Tag Archive for: San DIego Tax Attorney

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Common Causes of IRS Audits and How to Avoid Them

IRS Audit common causes

The Internal Revenue Service (IRS) is responsible for upholding federal tax laws and ensuring that individuals and businesses comply with them. One way the IRS carries out this duty is by conducting audits to verify that taxpayers have accurately reported their income, expenses, and other tax-related information. While the thought of an audit can be intimidating and stressful, it’s crucial to know that it’s a standard part of the tax process and can occur for various reasons.

An audit does not automatically indicate wrongdoing on your part. Many audits are either random or based on specific criteria that the IRS uses to identify potential issues. Understanding the triggers for IRS audits and how to avoid them can help lower your risk and ensure your tax return is precise and compliant with tax laws.

Keep reading to learn about the most common causes of IRS audits and effective strategies to minimize the likelihood of one.

What Are Common Causes for IRS Audits?

IRS can initiate an audit for various reasons. Some of these include:

Inconsistencies in Tax Returns

One of the most common causes of IRS audits is inconsistencies in your tax return. This can include large deductions, unreported income, or inconsistent information from year to year. To avoid inconsistencies, keep accurate records of your income, expenses, and other tax-related information. You should also double-check your tax return before you file it.

High Income

Another common cause of IRS audits is having a high income. If your income is significantly higher than others in your tax bracket, you’ll be more likely to be audited. To avoid being audited for having a high income, it’s important to accurately report your income and keep records of your expenses to support any deductions you claim.

Certain Deductions

Certain deductions, such as home office expenses or charitable contributions, may be more likely to trigger an audit. To avoid being audited for these deductions, keep accurate records and follow the guidelines set by the IRS. For example, if you claim a home office deduction, you should make sure that you have a dedicated workspace in your home that you use exclusively for business purposes.

Failure to Report All Income

If you fail to report all of your income, you increase your chances of being audited. Make sure you accurately report all of your income, including any freelance work, tips, or other forms of income.

Round Numbers

Using round numbers on your tax return, such as claiming exactly $10,000 in deductions, can trigger an audit. Use actual numbers instead of rounded figures, and keep accurate records to support your claims.

Gathering Support Documentation

A key aspect of avoiding an IRS audit and ensuring compliance with tax laws is gathering all necessary documentation to support your claims. This documentation serves as evidence for the information you have provided on your tax return and can help you defend yourself in the case of an audit. Some of the types of documentation you should have on hand include receipts, invoices, bank statements, and other records that support your income and expenses.

Keeping accurate and organized records will not only help you avoid an audit, but it will also make the audit process much easier if you are selected. In order to avoid missing any important documents, it’s best to keep all of your tax-related information in a single, organized location.

How to Avoid an IRS Audit

The best way to avoid an IRS audit is to ensure that your tax return is accurate and compliant with tax laws. To achieve this, there are several steps you can take:

A. Accurate Record-Keeping: Maintaining accurate and detailed records of your income and expenses is crucial to avoiding an audit. Make sure you have receipts, invoices, and other supporting documentation for all of your deductions.

B. Be Truthful: Always be truthful when reporting your income and expenses on your tax return. Falsifying information on your tax return can result in severe penalties, including fines and even imprisonment.

C. Consult with a Tax Professional: Consider consulting with a tax professional, such as an accountant or tax attorney, to ensure that your tax return is accurate and compliant with tax laws.

D. Review Your Return Before Filing: Before you file your tax return, review it thoroughly to ensure that all of the information is accurate. If you find any errors or discrepancies, make the necessary corrections before filing.

By taking these steps, you can reduce your risk of being audited and ensure that your tax return is accurate and compliant with tax laws.

In Conclusion

By keeping accurate records, double-checking your tax return, and accurately reporting all of your income, you can reduce your chances of being audited. If you are selected for an audit, it’s important to stay organized and well-prepared. If you are unsure of how to proceed, consider reaching out to a tax professional for assistance.

At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.Interested in learning more? Read on to learn how to respond to an IRS audit.

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IRS Audit Checklist: What to Expect and How to Prepare

IRs audit checklist

The thought of an IRS audit can be daunting. IRS may select your tax return for various reasons, including random selection, suspicion of incorrect reporting, or because your return is different from others in your demographic. Regardless of the reason, you need to be ready by having all the necessary documents and information on hand.

In this article, we will provide you with a comprehensive list of items and documents you should expect to provide during an audit and tips on how to prepare.

What to Expect During an Audit

An audit is a process that involves a thorough review of an organization’s financial records and operations to ensure compliance with applicable laws and regulations. If you’re facing an audit for the first time, here’s what you can expect:

Preparation: Before the audit begins, you’ll need to gather and organize all relevant financial documents and records, including bank statements, receipts, invoices, and contracts.

Planning: The auditor will work with you to plan the audit, which will involve establishing timelines, determining the scope of the audit, and identifying any potential risks or issues.

Fieldwork: The auditor will visit your organization to conduct on-site inspections, conduct interviews with staff, and review relevant documents and records.

Findings: The auditor will prepare a report outlining their findings and any areas of concern, along with recommendations for addressing any issues that were identified.

Follow-up: After the audit is complete, you’ll be expected to address any findings and take steps to improve your organization’s financial management and compliance.

While an audit can be a complex and challenging process, it can also be an opportunity to identify areas of improvement and strengthen your organization’s financial practices.

IRS Audit Checklist: What Documents Are Required for an IRS Audit? 

During an audit, the IRS auditor will want to see evidence that supports the information you reported on your tax return. This may include, but is not limited to, the following items:

Proof of Income: 

W-2s, 1099s, and other forms that show the income you received from various sources.

Receipts and Records of Expenses: 

This includes receipts for business expenses, charitable contributions, medical expenses, and other itemized deductions.

Bank Statements: 

The auditor will want to see your bank statements to verify that the deposits and withdrawals reported on your tax return match the information on your bank statements.

Investment Records: 

The auditor will want to see stock or bond certificates, brokerage statements, and any other records related to your investments.

Business Records: 

If you are self-employed or have a small business, the auditor will want to see your business records, including ledgers, invoices, and any other records related to your business operations.

Home Office Expenses: 

If you claim a home office deduction, the auditor will want to see documentation of your expenses, such as utility bills, mortgage or rent payments, and repairs and maintenance costs.

Vehicle Expenses: 

The auditor will want to see records of your vehicle expenses, such as gas receipts, maintenance receipts, and a log of your business miles.

Retirement Plan Contributions: 

Theauditor will want to see records of your contributions, including contribution receipts and records of employer contributions.

Charitable Contributions: 

Theauditor will want to see records of your contributions, such as receipts from charities and bank statements showing the contribution.

How to Prepare for an Audit

An audit goes as well as you prepare for it. To prepare for an audit, consider the following steps:

Gather all the necessary documents: Make sure you have all the necessary documents listed above. If you don’t have a particular document, try to obtain it as soon as possible.

Organize your records: Make sure your records are organized and easily accessible. This will make it easier for you to locate the information the auditor needs.

Review your tax return: Before the audit, review your tax return to make sure that all the information is correct and that you have documentation to support the information.

Seek professional help: If you are unsure about how to prepare for an audit or if you need help with your records, consider seeking the help of a professional tax preparer or accountant.

Be honest: During the audit, be honest and straightforward with the auditor. If you made a mistake, admit it and provide any necessary documentation to support the correction.

Summary

An IRS audit can be a stressful experience, but by being prepared and having all the necessary information and documents on hand, you can reduce your stress and increase your chances of a successful outcome.

At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.Interested in learning more? Read on to learn how to respond to an IRS audit.

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What is an IRS Audit and How Does it Work?

IRS audit

An IRS audit is a review of your tax return to ensure that you have accurately reported your income, expenses, and other tax-related information. The audit is conducted by the Internal Revenue Service (IRS) to ensure compliance with tax laws and regulations.

While the thought of an IRS audit can be daunting, it’s important to understand what the audit process entails and how to prepare for it. In this article, we’ll provide an overview of the IRS audit process and what you can expect.

What Triggers an IRS Audit?

The IRS has a variety of methods for selecting tax returns for audit, including computer screening and random selection. However, there are certain red flags that may increase your chances of being selected for an audit, including:

High Income:

 If your income is significantly higher than others in your tax bracket, you may be more likely to be audited.

Inconsistencies in Your Tax Return:

 If there are discrepancies in your tax return, such as large deductions or unreported income, you may be more likely to be selected for an audit.

Certain Deductions: 

Certain deductions, such as home office expenses or charitable contributions, may be more likely to trigger an audit.

What to Expect During an IRS Audit

The audit process can vary depending on the type of audit you receive. There are two main types of audits: correspondence audits and field audits.

Correspondence Audits: 

These are the most common type of audit, and they are conducted through the mail. The IRS will send you a letter requesting additional information or clarification on certain items on your tax return. You will need to respond to the letter and provide the requested information.

Field Audits: 

Field audits are in-person audits that are conducted at your home or place of business. During a field audit, an IRS agent will come to your location to review your records and tax-related documents.

During an IRS audit, you can expect the following:

Notification: The IRS will notify you of the audit through mail or phone. This notification will explain the reason for the audit and specify the tax year(s) being examined.

Documentation: You will need to provide the IRS with supporting documentation for the items being audited. This may include receipts, bank statements, and other records that support the information reported on your tax return.

Communication: The IRS will communicate with you regarding the audit process and request any additional information or documentation. It is important to respond promptly to any requests from the IRS to avoid potential delays in the audit process.

Examination: The IRS will examine the information and documentation provided to determine if any changes need to be made to your tax return. This examination may be conducted through a correspondence audit, where the IRS communicates with you through the mail, or a field audit, where the IRS visits you in person to review your records.

Outcome: The outcome of the audit can result in a conclusion that your tax return is accurate as filed, a proposed change to your tax return, or a tax bill for additional taxes owed. If the IRS finds any discrepancies, they may also assess interest and penalties on the additional tax owed.

Appeal: If you disagree with the outcome of the audit, you have the right to file an appeal. This must be done within 30 days of the date on the IRS’s final determination letter.

It is important to note that the IRS has the right to audit your tax return at any time within three years of the filing date, or six years if they suspect a significant underreporting of income. It is also important to keep accurate records and maintain good documentation, as this can assist you in the event of an audit. If you are unsure about how to proceed during an audit, you may consider seeking the assistance of a tax professional.

What Documents Do You Need to Prepare during an IRS Audit?

Regardless of the type of audit you receive, you should be prepared to provide the following items:

  • Copies of your tax returns
  • Supporting documentation for items on your tax return, such as receipts, invoices, and bank statements
  • Records of any changes or corrections you made to your tax return after filing
  • How to Prepare for an IRS Audit

The best way to prepare for an IRS audit is to stay organized and keep accurate records of your income, expenses, and other tax-related information. Here are some tips to help you prepare:

What to do If You Receive Notice of an IRS Audit

There are several steps you can take if you receive notice of an IRS audit. For instance, you can begin with:

Keeping Accurate Records: 

Maintain accurate records of your income, expenses, and other tax-related information, including receipts, invoices, and bank statements.

Responding Promptly:

 If you receive an audit notice, respond promptly and provide the requested information. The quicker you respond, the quicker the audit process will be.

Hiring a Tax Professional: 

Consider hiring a tax professional to assist you with the audit process. Tax professionals have extensive knowledge of the audit process and can help you prepare, respond to questions, and negotiate on your behalf.

In conclusion, an IRS audit can be a confusing and intimidating experience, but it’s important to understand the audit process and how to prepare for it. By being organized and well-prepared, you can reduce stress and ensure a positive outcome. If you receive an audit notice, don’t hesitate to reach out to a tax professional for help.

Learn More About Milikowsky Tax Law

At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.

Interested in learning more? Read on to learn how to respond to an IRS audit in 2022.

Will There Be More IRS Audits This Year?

 As the tax season approaches, many Americans are wondering what changes they can expect from the IRS, especially given the recent funding allocated to the agency through the Inflation Reduction Act. This bill, passed by Senate Democrats in August 2022, allocated nearly $80 billion to the IRS over the next decade, leading to questions about the potential for increased audits. 

So, will there be more audits this year? For average earners, the short answer is: probably not. However, for business owners and high earners, the answer is yes. 

The founder of Milikowsky Tax Law, John Milikowsky, explains the impact from the Budget Reconciliation Bill in detail. Check out the video below for more information:

In this article, we will delve into the ramifications of the Inflation Reduction Act, which has provided $80 billion to the IRS. We will also examine the potential impact on audits for taxpayers in the current year. Despite the perception that this funding would result in a higher rate of audits, it is unlikely that the audit rate for average earners will see a significant increase.

The Inflation Reduction Act: What is it and What Does it Mean for Taxpayers?

In August 2022, Senate Democrats passed the Inflation Reduction Act, which allocates nearly $80 billion to the International Revenue Service (IRS) and leaves taxpayers asking: What are the tax implications of this bill? Will there be more audits? How will audits change?

Let’s discuss where exactly the money is going. 

Enforcement: IRS is Hiring

According to the 2021 IRS Data Book, IRS in Fiscal Year 2021 had about 79,000 full-time equivalent (FTE) employees, and about 35,000 of them were dedicated to enforcement activity.

In 2021, IRS closed about 739,000 tax examinations and processed more than 261 million tax returns and supplemental documents. This number of tax examinations in 2021 was less than half of the number of tax examinations in 2012.

Average Earners Will Likely Not Be Impacted

Statistically, taxpayers reporting either no income or over $1 million have the highest likelihood of being audited, while those with middle incomes have a low chance. This trend is not expected to change in the future, despite the $80 billion in funding for the IRS under the Inflation Reduction Act. In fact, this funding may benefit those with average incomes rather than harm them.

As discussed, the $80 billion in funding for the IRS is allocated as follows: $45.6 billion for enforcement, $25.3 billion for operations support, $4.8 billion for business system modernization, and $3.2 billion for taxpayer services. 

Ideally, the IRS will use a significant portion of the funding for taxpayer services to hire more staff and provide more assistance to taxpayers who need help with filing or have questions outside of tax season. This could potentially lead to faster processing times for paper returns and quicker refunds.

The allocation of funding towards enforcement has raised concerns among many people. However, the IRS has stated that taxpayers earning less than $400,000 a year should not expect an increase in audits. This means that the average American does not have to be concerned.

Self-Employed Business Owners Are More Likely to be Audited

Self-employed business owners will be more likely to be audited as a result of this bill. Why? IRS is focused on self-employed people, whose financial situations can become tricky.

For example, in these businesses, there are no W-2 jobs with a paycheck; there is just money coming in and going out. This increase in audits means that self-employed people will have to be even more careful in filing the proper forms and providing the correct taxable income.

High-Earners or High Income Taxpayers Are More Likely to be Audited

A high-income taxpayer, or high-earner, is defined by IRS as someone who generally receives income in excess of $100,000 during a tax year. However, we typically see audits for high-earners of $200,000, $250,000, or higher.

According to Paul Mamo, Director of Collection Operations, Small Business/Self Employed Division at IRS, “The IRS is committed to fairness in the tax system, and we want to remind people across all income categories that they need to file their taxes…These visits focusing on high-income taxpayers will be taking place across the country.”

Non-filers

While non-filers can be considered someone who did not file taxes for a single year, usually we are looking at a taxpayer who has skipped at least a couple years or more. At Milikowsky Tax Law, we have some clients who haven’t filed tax returns for five, six, seven years, a significant amount of time.

House Republicans Vote to Rescind I.R.S. Funding

In one of their first legislative actions of early 2023, House Republicans voted to reduce funding for the Internal Revenue Service (IRS). Conservative lawmakers are attempting to weaken President Biden’s $80 billion revamp of the struggling agency. 

However, the bill, which passed in the House by a vote of 221 to 210 along party lines with all Democrats voting against it, is unlikely to pass in the Democratic-controlled Senate or be signed into law by President Biden.

In Summary

The Inflation Reduction Act, passed by Senate Democrats in August 2022, allocated nearly $80 billion to the IRS over the next decade, leading to questions about the potential for increased audits. However, it is unlikely that the audit rate for average earners will see a significant increase. Statistically, taxpayers reporting either no income or over $1 million have the highest likelihood of being audited, while those with middle incomes have a low chance. This trend is not expected to change in the future, despite the $80 billion in funding for the IRS under the Inflation Reduction Act. 

The allocation of funding towards enforcement has raised concerns among many people. However, the IRS has stated that taxpayers earning less than $400,000 a year should not expect an increase in audits. Self-employed business owners and high-income taxpayers will be more likely to be audited as a result of this bill.

Still Have Questions?

Business owners should contact Milikowsky Tax Law if they have any additional questions about how the Inflation Reduction Act will impact them.

At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.Interested in learning more? Read on to learn how to respond to an IRS audit in 2022.

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Should You File Delinquent Returns If You Can’t Afford to Pay?

One common question that clients often ask is whether they should file their delinquent tax returns if they can’t afford to pay the taxes owed. The answer is always yes. It is better to file your tax return and work out a payment plan with the IRS than to not file at all.

The Consequences of Not Filing a Tax Return

The penalty for failing to file a tax return is 5% per month of the balance owed, up to a maximum of 25% after five months. In contrast, the penalty for failing to pay is only a half a percent per month. This means that the IRS is more interested in having you file your return than in collecting the taxes owed immediately.

Furthermore, if you fail to file a return, the IRS may eventually file an SFR (substitute for return) on your behalf, which will include no deductions and could result in a larger tax bill than if you had filed a return yourself.

Negotiating Payment Plans with the IRS

If you can’t afford to pay your taxes in full, you can negotiate a payment plan or even a deferred payment plan with the IRS. But to do this, you must first file your tax return.

To avoid problems when filing delinquent returns, it is essential to confirm the income reported to the IRS. You can do this by requesting a wage and income transcript if you are an individual, or an ERPTA report if you have a business. This will show you all the 1099s that have been reported to the IRS regarding your income or business.

Contacting a Tax Attorney for Help

If you have missing or delinquent tax returns, it is best to file them as soon as possible based on the best information available. You can also contact the IRS to negotiate a payment plan or hardship if needed. It’s always better to take action sooner rather than later.

If you need help filing delinquent returns or negotiating with the IRS, it’s always best to contact a tax attorney who can guide you through the process and provide legal representation if needed.

In conclusion, always file your tax return, even if you can’t afford to pay it. Contact the IRS to negotiate a payment plan and confirm reported income to avoid problems when filing delinquent returns. If you need legal representation or assistance, don’t hesitate to contact a tax attorney for help.

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Your Checklist to Prepare for IRS Audits in 2023

What To Do If You Receive an IRS Audit Letter

If you receive an audit letter from the Internal Revenue Service (IRS), it can be a stressful and daunting experience. However, there are several things you can do to prepare for the audit and make the process go more smoothly. In this blog, we’ll go over three things you can do today if you receive an IRS audit letter.

Contact the Revenue Agent and Ask for Additional Time

The first thing you should do is contact the revenue agent who is listed on page one of the audit letter. You’ll find a telephone number and the name of the agent. You should ask them for additional time to prepare for the audit. The IRS will give you 10 days to contact them from the day you receive the letter. However, you’re going to need more time to gather all the necessary documents and records. So, ask them for at least 30 days, and maybe even 60 days, depending on where the records are located. The audit letter requests that you set a meeting with the IRS and provide them with all the necessary records and information to substantiate each and every number on your return.

Contact Your CPA and Get a Copy of Your Tax Return

If you have a Certified Public Accountant (CPA), the next thing you should do is contact them and get a copy of your tax return. You want to make sure that you have all the necessary records to support each number on your return. If you 

don’t have a CPA and you prepared the return yourself through TurboTax, you’re going to want to at least get your bank statements, canceled checks, and deposits, and start from there.

When preparing for an audit, a law firm like Milikowsky Tax Law goes through the bank statements and performs a bank deposit analysis. This means that every deposit that goes into the bank account is counted to ensure that the right income number is reported.

Request a Wage and Income Transcript and an ERPTR Report from the IRS

Another thing you can do from day one is to call the IRS and request a wage and income transcript for yourself. If you have a business, you’re going to want to ask for an ERPTR report, which stands for “Electronic Return Program Transaction Report.” This report will show you all the income reported by third parties for your business, making sure that it is accurate and that you reported the correct amount of income on your tax return. 

In 2022, a new development is that the IRS wants to identify any sources of income you received through cryptocurrency on the 2022 1040 return. The IRS considers cryptocurrency or virtual currency as property, and everything is potentially included as taxable income. If you bought or sold cryptocurrency or received it as payment, you’ll want to have proof of its value.

Always Be Truthful to the IRS

Most importantly, always be truthful to the IRS. If you don’t have the information or realize there may be a discrepancy, definitely call a tax attorney. A tax attorney can help you develop a narrative and a strategy before meeting with the IRS. There are always two sides to a coin, and multiple ways to interpret something. You want to have all the facts, all the documents ready, understand where the problems are, and have a tax attorney go through all of it to provide a legal defense and a narrative to explain to the IRS how the numbers are coming together. This will facilitate the audit process and make it go more smoothly.

In conclusion, receiving an audit letter from the IRS can be intimidating, but there are steps you can take to prepare for the audit and make the process go more smoothly. To sum it all up: Firstly, contact the revenue agent and ask for additional time to prepare for the audit, ideally 30 to 60 days. Secondly, contact a Certified Public Accountant (CPA) or obtain necessary records and documents to support each number on your return. Finally, request a wage and income transcript and an Electronic Return Program Transaction Report (ERPTR) from the IRS, always be truthful when dealing with the IRS, and contact a tax attorney to support you in the process. 

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The CPA’s Guide to Helping a Client with an SBA PPP Loan Forgiveness Denial

When the COVID-19 pandemic wreaked havoc on small businesses, the U.S. government stepped in to offer some relief in the form of SBA PPP (Paycheck Protection Program) loans. Those loans were designed to help businesses keep their doors open and their employees on the payroll. However, even with the best of intentions, there were bound to be some complications when it came to forgiveness. If your client has had their SBA PPP loan forgiveness denied, here’s what you need to know.

The Role of the CPA

While CPAs are not allowed to represent clients or file an appeal with the OHA (Office of Hearings and Appeals) on SBA forgiveness denials, they play a critical role in the process. The CPA has knowledge of how the company works, knows where the records are, and can help reconcile everything. In all cases, including the CPA in the appeal is essential, as it ensures that the information submitted to OHA is accurate.

Three Things You Can Do to Help Your Client

If your client has been denied loan forgiveness, there are three things you can do to help them prepare for an appeal, whether they decide to represent themselves or hire an attorney.

Reconcile Payroll Records

The first thing to do is to reconcile payroll records. Make sure that the gross wages reported on the payroll returns match the federal income tax returns, W-2s, W-3s, and payroll journal. If any of these numbers do not match, it could be due to an amended quarterly payroll return that was not reflected on the general ledger, for example. It is essential to ensure that all the numbers match before submitting an appeal.

Exclude Wages Over $100,000

Only wages of $100,000 or less are eligible for the PPP loan. To calculate the PPP loan amount, add up the gross wages, state unemployment insurance tax, and employee benefits, such as health insurance, 401k contributions, and uniforms (if required and paid for by the employer). Calculate the average monthly payroll costs for 2019, divide by 12, and multiply by 2.5. For the hospitality industry, this number can be multiplied by 3.5, as per SBA regulations.

Confirm the Right Party Is Reporting the Wages

If a company used a PEO (Professional Employer Organization), confirm that the wages are reported under the PEO’s EIN (Employer Identification Number). However, if the wages were reported under a management company’s EIN, it becomes more complicated. In this case, it is crucial to review the hotel management agreement and determine whose employees they were. If there was a co-employer relationship, the management company and hotel owner could both be held responsible for the employees. If SBA sees that the management company is responsible, the PPP loan forgiveness could be denied, and the client might have to repay the full amount back. It is essential to explore this scenario and present it legally in an appeal to the SBA.

Additional Considerations

If your client has a PPP2 loan, they must have applied for and received a PPP1 loan to qualify. They must also have had a reduction in gross income in 2020, either in a specific quarter or a 25% or greater reduction in year-end income. It is also important to consider the affiliation rules if the company has multiple owners or investors. You must get a total count of employees, including any employees from other companies owned by the investors. You must ensure that there is no control from any one common investor or shareholder who owns other businesses.

Conclusion

The SBA PPP loan forgiveness process can be complicated, and denial can have serious financial consequences for small businesses. As a CPA, you can play a critical role in helping clients prepare for an appeal by reconciling payroll records, excluding wages over $100,000, and confirming the right party is reporting the wages. It is also important to consider additional factors such as PPP2 eligibility and affiliation rules. While CPAs cannot represent clients in appeals with the OHA, their expertise can help ensure that accurate information is submitted, improving the chances of a successful outcome. With the right preparation, small businesses can navigate the forgiveness process and emerge from the pandemic with a solid financial footing.

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Where Have All the CPAs Gone?

cpa helping some clients

The United States is currently experiencing a severe shortage of certified public accountants (CPAs) due to a rising trend of accountants leaving their positions at both corporations and audit firms. This trend is coupled with a decline in the number of new graduates entering the field, leading to a critical shortage of professionals. This growing issue has many questioning the reasons behind the shortage and the impact it will have on the accounting profession.

This phenomenon leaves many asking questions such as: Where have all the CPAs gone? 

Let’s take a look at why this trend is occurring, what this could mean for U.S. businesses,  and how we can help support CPAs. 

Background

According to a Bloomberg Tax analysis, there has been a 17% decrease in the number of employed accountants and auditors from a peak in 2019. Despite this decrease, the demand for accountants has not slowed down. 

On average, the U.S. Bureau of Labor Statistics (BLS) predicts that there will be approximately 136,400 job openings for accountants and auditors annually between 2021 and 2031. These openings will be a result of current professionals leaving the field for other occupations or retiring. 

The BLS states in their occupational outlook handbook that the employment growth of accountants and auditors is closely tied to the overall health of the economy.

Why Is There a CPA Shortage?

There are several reasons why there is a shortage of certified public accountants (CPAs) in the United States, including:

  1. High turnover and increasing demand
  2. Decreasing number of graduates earning a degree in accounting
  3. Effects of the COVID-19 pandemic

Let’s take a look at each of these in detail.

High Turnover

The shortage of CPAs is being exacerbated by both high turnover and increasing demand. Many accountants are leaving their jobs at corporations and audit firms in unprecedented numbers, due to factors such as low morale and early retirement. While the accounting profession has long anticipated a shortage of talent due to the retirement of the large baby boomer generation, this crunch has occurred earlier and more severely than expected, as a result of the widespread trend of resignations.

College Graduates

The number of college graduates earning a degree in accounting has dropped 4% since the onset of the COVID-19 pandemic and the number of graduates sitting for the CPA exam has also decreased. This is compounded by the large number of baby boomer CPAs retiring, resulting in a shortage of professionals to tackle more and more challenging work.

Effects of the COVID-19 Pandemic

The unique stresses workers have faced since 2020 have exacerbated conditions that were already causing young people to think twice about entering the profession such as high work hours, high-stress deadlines, high risks associated with potential reporting errors and lower wages compared to other jobs in finance. Furthermore, the accounting profession has been criticized for its lack of diversity and failure to embrace diversity, equity and inclusion.

What Will the Effects of the CPA Shortage Be?

As the shortage of CPAs continues, the potential consequences are vast and far-reaching. The SEC’s concerns about the risk of financial reporting deficiencies across U.S. businesses is a major concern, as it could lead to unreliable financial information and mistrust in the financial system. This can negatively impact not just businesses but also investors, stakeholders and the public.

Additionally, with fewer CPAs available to tackle the workload, the remaining professionals may be overworked and stressed, leading to burnout and a further exacerbation of the shortage. The shortage may also lead to increased competition for top talent, which could result in higher salaries and increased benefits for accounting professionals. However, this could also lead to a further decrease in diversity, equity and inclusion.

The shortage of accountants and auditors is having a clear impact on the quality of audits. Public companies are facing difficulties in finding qualified professionals to conduct their audits, and when they do, they often have to push them to work harder. This leads to important checks being skipped and errors or discrepancies going unnoticed. As a result, companies risk facing penalties from the SEC for late filings, as well as fines and negative market reactions if errors are present in their financial statements. Even small errors can lead to a significant decline in stock prices.

Moreover, the shortage of CPAs can also result in higher prices for accounting services as the demand for these services will be more than the supply, which will negatively impact small and medium-sized businesses.

It is important to note that the solutions to this problem cannot be found overnight and will require a comprehensive and long-term approach. The accounting profession should focus on increasing the number of new graduates entering the field, making the profession more diverse, equitable and inclusive, and ensuring that the work environment is such that it retains its professionals.

How Can We Support CPAs in the Shortage?

There are several ways to support CPAs during the current shortage:

  1. Encourage more students to pursue accounting: By encouraging more students to pursue accounting degrees and take the CPA exam, the pipeline of new professionals can be replenished.
  2. Increase the diversity and equity of the profession: by encouraging and supporting individuals from underrepresented communities to join the accounting profession, we can help increase the diversity of the profession, and also help to retain professionals from these groups.
  3. Increase the flexibility of the profession: By promoting flexible work arrangements, such as telecommuting or part-time work, we can help to retain professionals who may be struggling to balance the demands of the profession with personal responsibilities.
  4. Provide support for professional development: By providing financial assistance, training and mentorship opportunities, we can help professionals to continue to develop their skills and stay up-to-date with the latest industry trends.
  5. Improve the work environment: By addressing the issues of high stress, long hours, and high risk of errors that are causing many professionals to leave the profession, we can help to make the profession more appealing to both new and existing professionals.
  6. Recognize the importance of the profession: By highlighting the importance of the profession and the vital role that accountants play in ensuring the stability and integrity of the financial system, we can help to increase public respect for the profession and help to attract new professionals.
  7. Create incentives: Governments and other organizations can create incentives for companies to hire and retain more CPAs.
  8. Support aging professionals: Provide support for aging professionals to continue working in the profession, such as through phased retirement programs or alternative career paths.
  9. Professional development: Encourage professional development opportunities for accountants to keep their skills current and enhance their knowledge in the field.
  10. Encourage mentorship: Encourage mentorship programs between experienced accountants and new graduates to ensure that the new generation is well-trained and prepared for the challenges of the profession.

Learn More About Milikowsky Tax Law

CPAs make up the lion’s share of our referral partnerships. Because we do not do our clients’ taxes, we are a great partner for CPA firms whose clients are facing complex tax audit situations.

Learn more about us, here. 

Read on for insights for CPAs to minimize audit risk for their clients.

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What Triggers an IRS audit in 2023?


Are you worried about getting audited by the IRS? It can be a daunting prospect, but there are certain things you can pay attention to that might help you avoid an audit or at least be better prepared for one.

According to John Milikowsky, founder of Milikowsky Tax Law, there are three key triggers that might prompt the IRS to audit you: delinquent returns, cryptocurrency, and mismatches of income.

Delinquent Returns

If you have not filed your tax returns for more than three years, you have a higher risk of being audited. The government is keen to ensure that all taxpayers are meeting their tax obligations, so it’s important to make sure you are up to date with your filings.

Cryptocurrency

With the rise of cryptocurrency, the IRS has become increasingly interested in tracking down those who are not reporting their virtual currency holdings. In fact, there is now an entire section on the tax return for reporting cryptocurrency income, and the government wants to know the source of your income, whether you received it as a gift, and any transfers you made. It’s important to keep good records and ensure that you are reporting all of your cryptocurrency income.

Mismatches of Income

The IRS receives information returns from third parties, such as 1099s and W-2s, which report your income. If you have a job or own a business, you will have received these forms, and the IRS will expect your tax return to match the information they have on file. If there are any mismatches, your return could be flagged for audit. To avoid this, it’s a good idea to request a wage and income transcript or an Erpta report before filing your return.

What to Do If You’re Audited

If you do get audited, there are a couple of different types of audit that might occur. In many cases, you will receive a correspondence audit, which means the IRS will send you a letter requesting additional information or documentation. In other cases, the IRS might send someone to contact you in person and request all of your documents. It’s important to respond promptly and provide all the information that is requested.

In conclusion, if you want to avoid an IRS audit, make sure you are up to date with your filings, report all of your cryptocurrency income, and ensure that your tax return matches the information the IRS has on file. And if you do get audited, don’t panic – just make sure you respond promptly and provide all the information that is requested. With a little bit of preparation and attention to detail, you can stay on the right side of the IRS and avoid any unnecessary stress or hassle.

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SBA PPP LOAN FORGIVENESS DENIAL APPEALS

The team at Milikowsky Tax Law has successfully appealed numerous Paycheck Protection Program Loan Forgiveness denials and we are ready to help you bring your case to the SBA for consideration.

WHAT TO DO IF YOU RECEIVE A LETTER OF DENIAL FROM THE SMALL BUSINESS ADMINISTRATION (SBA)

If you received a letter from the SBA denying your forgiveness request for your PPP loan within the last 30 days, the clock is ticking.  You have 30 days to respond and file your appeal.  The timeline for SBA forgiveness appeals is inflexible. Once your initial 30-day period expires you will lose your right to appeal SBA’s denial to forgive your PPP loan.

We strongly recommend you hire an attorney to represent your company in the SBA appeal process. The ONLY individuals who can represent your company in the appeal process are: An owner, a company officer, or an attorney. CPAs are not authorized to represent borrowers in the appeal process.

STEPS YOU MUST TAKE TO APPEAL YOUR SBA LOAN FORGIVENESS DENIAL

(this is not a complete list but a summary)

  1. Review “Final SBA Loan Review Decision Letter”
  2. Confirm your deadline to appeal the SBA decision
  3. Gather your documents & facts to identify issues to raise in your appeal
  4. Review SBA’s prior legal decisions & rulings
  5. Draft your Appeal (max 20 pages) and include exhibits (your evidence) and SBA’s Final Loan Review Decision Letter.
    *You must include your legal arguments, facts, and legal authority to support your position to show SBA’s denial was “clearly erroneous” (there are additional requirements – see SBA’s website).
  6. Create an online account at appeals.sba.gov.
  7. Answer all questions truthfully and completely when responding to SBA’s online questionnaire.
  8. Identify a legal representative for your business to handle the SBA Appeal.
  9. Upload your appeal, exhibits, and SBA Final Decision Letter.

SBA PPP LOAN FAQS & TIPS

Compliance, deductions, forgiveness, employees, the CARES Act has offered support and raised many questions. The experienced team at Milikowsky Tax Law is here to sort through all of the information and give you facts and strategies for your business as you resolve your SBA loan forgiveness.

If my PPP loan is eventually forgiven, can I deduct expenses on my tax return that I paid with my PPP loan?

Currently, IRS published Notice 2020-32 that prohibits deducting expenses if paid with a forgiven PPP loan.

Does the CARES Act exclude from payroll costs employee compensation greater than $100k?

Yes. However, the exclusion only applies to cash compensation and does not apply to all employee benefits such as contributions to a defined benefit retirement plan, group health care coverage, and payment of state/local taxes assessed on compensation.

Can a business include payments to an independent contractor or sole proprietor in the calculations of payroll costs?

No. The independent contractor or sole proprietor is itself potentially eligible for a PPP loan if it satisfies the requirements.

What rules should I rely on to ensure my business complies with the PPP requirements?

A borrower may rely on the laws, rules and guidance available when it submitted its application through the time its application was accepted.

Are there any restrictions on which employees are paid with SBA PPP loan funds?

Yes, employees need to have their “principal place of residence” in the United States.

To determine borrower eligibility for the “500-employee threshold” per the CARES Act, should a borrower count all employees or only full-time equivalent employees?

For purposes of loan eligibility, borrowers must calculate the total number of employees including part-time employees. For purposes of “loan forgiveness,” employers must use “full-time equivalent” employees to determine the extend the forgiveness amount will be reduced for workforce reductions.

Will SBA review all loans to ensure loans were provided to eligible borrowers?

Yes. SBA, in consulting with the Department of the Treasury, will review all loans greater than $2 million (as well as other loans) after a borrower submits a loan forgiveness application to ensure PPP loans were provided to eligible borrowers.

Will SBA review PPP loan of $2M or greater to ensure borrowers accurately and truthfully certified that “current economic uncertainty makes this loan request necessary to support the ongoing operations…”?

Yes. However, a safe harbor provision applies to SBA’s review of PPP loans. Borrowers with an original principal amount less than $2M are deemed to have made the required certification regarding the necessity of the loan request in good faith. Borrowers with loans greater than $2M must be able to substantiate their certification in good-faith. If SBA determines a borrower lacked adequate basis for the required certification, SBA will seek repayment. SBA indicates it may not pursue administrative enforcement or referrals to other agencies (i.e. IRS) if the loan is repaid. However, there is no guidance at this time regarding the amount of time to repay the loan once SBA determines a borrower was not eligible for the loan.

Can an individual who is a partner in a partnership or member of an LLC file a separate application for an SBA PPP loan?

No. The PPP loan must be filed by the partnership or LLC. Only individuals who are self-employed or sole proprietors who filed a Form 1040 Schedule C for 2019 are eligible to file a PPP loan application if they were in operation on February 15, 2020 and their principal place of residence was in the U.S.