How Small Businesses Can Avoid a Tax Audit

WSJ Blog

By Kelly Spors

… The message for you: The tax auditor might want to take a look at your books. So how can you avoid that?

… We spoke with Bill Fleming, managing director of PricewaterhouseCoopers office in Hartford, Conn., to get some ways businesses might lessen their chance of an audit.

Here are some possible ways he recommends:

- Keep personal and business expenses apart. … Mr. Fleming recommends being extra diligent about keeping business and personal expenses separate, holding separate business and personal credit cards and bank accounts so you have clearer documentation and lessen the chance you’ll inadvertently mix expenses in your tax reporting. And if you are audited, you better have your story straight: “Make sure that business auto looks like it’s used for business. Fill it with stuff, plaster advertisements on it,” Mr. Fleming says.

- Avoid “miscellaneous” expenses. … “Don’t have $2,000 or $3,000 of ‘other stuff,’” Mr. Fleming says.

- Keep organized records and receipts. … Messy records look like somebody’s trying to hide something or may have forgotten to document that one big payment. …

- Hire a trusty accountant. … A seasoned tax preparer can not only advise you on what tax breaks are available, but should have enough experience with audits to help you minimize your risk.

- Avoid the home-office deduction. … [For] many, the tax break is meager compared to the potential headaches it can cause.

- File an extension. People used to believe that filing for an extension increased the risk of audit. But some studies have shown that filing for an extension actually reduces the audit risk at least slightly, Mr. Fleming says. …“If you don’t mind delaying filing your return, it might help,” he adds.

Other tips on preventing tax audits can be found here, here and here.

Knowing which way the wind blows

Employee Benefit News

Ten key trends to assess the present, forecast the future of 401(k) plans

By Steve Smith and Laura White

October 1, 2008

In the ever-changing retirement plans landscape, it can be challenging to keep pace with current trends in 401(k) plans, let alone try to predict what lies ahead. …

Collectively, a broad range of industry experts concur that the future looks bright. …

Specifically, there are 10 key trends that will affect 401(k) plan sponsors and participants over the next five years.

Plan sponsor trends

1. Vendor consolidation

Vendor consolidation will allow plan sponsors to realize lower costs through economies of scale, reduction of infrastructure expenses and more efficient use of technology. ...

2. Plan consolidation and total retirement outsourcing

Consolidation continues to gain ground at the plan level, whether in the form of combining multiple DC plans into one; terminating or freezing DB plans and enhancing the DC plan; or using one vendor to manage multiple types of plans, such as DB, DC, and nonqualified deferred compensation plans. ...

Looking ahead to 2013, plan consolidation is expected to continue, while the decline of DB pension plans will slow.

3. Buyer behavior

... While fee-for-service consulting will prevail with due diligence activity reaching an all-time high, provider turnover will likely be reduced due to a greater focus on establishing long-term relationships between plan sponsors and providers. As a result, vendor searches are expected to drop to historically low levels.

4. Impact of fiduciary duties on plan management

Another key trend is increasing plan sponsor focus on fiduciary responsibilities, with experts projecting that the effects of the Pension Protection Act will continue well into the next decade. …

5. Investment shifts

Fiduciary responsibility regarding investment selection and monitoring is increasing, a trend expected to intensify in the next five years….

Participant trends

6. Automatic enrollment

Thanks in large part to the increased use of automatic enrollment, participation rates are on the rise, and by 2013, three-fourths of plan sponsors will adopt this approach.

A related phenomenon is the rapid growth of other automatic features designed to help participants manage their accounts, including automatic deferral escalation and automatic investing alternatives, such as target date funds and other age-based investment solutions.

Five years from now, experts forecast that about one-half of all plan sponsors will adopt automatic account management features.

7. Increasing electronic service delivery

Electronic delivery of retirement plan services to participants will increase, with Web usage overtaking voice response systems in the next five years. ...

Interactivity will also become more commonplace, according to experts, who anticipate increased use of online chat and live video access to contact center representatives.

8. Greater employee responsibility leads to more attractive plans

… [Workers] will demand plans that include immediate employer contributions, immediate vesting, multilingual communications and global integration of benefits for multinational employers.

9. Rebirth of annuities

... The rebirth of annuities and development of "in-plan annuities" is a response to the need to retire employees with an acceptable standard of living and an income stream they won't outlive. ...

10. Baby boomer retirement

... As a result of this generation staying in the workforce longer, employers will need to adapt to phased retirement.

The trend to semiretirement raises a number of possibilities which can not yet be firmly predicted, including: delayed commencement age for minimum distributions; increased minimum age for penalty-free withdrawals; delayed age for receiving full or early Social Security benefits; and the diversion of employer contributions to support health care plans.

While these and other issues will be on the table for the next presidential administration and industry experts to address, plan sponsors can look ahead with confidence that the future of 401(k) plans will continue to be promising. Although the challenges associated with these plans will continue to rise over the next five years, the maturity, efficiencies and growing expertise of all parties involved with 401(k) plans will allow plan sponsors and participants to be better prepared for retirement.

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Steve Smith is corporate plans product leader and vice president of sales for Diversified Investment Advisors. Laura White, CEBS, is a vice president, marketing at Diversified Investment Advisors. She is an author of Diversified's new report, "Prescience 2013: Expert Opinions on the Future of Retirement Plans."

Small Firms Resort to Freebies and Special Deals

In hard economic times, customers look for "something for nothing." Besides being expensive, such special deals may cause your market to think of you as the cheap supplier. A small business would lose a major part of their value proposition. Other options are to focus advertising, reduce upfront costs, and tie payment for the product/service to value received by the client.

How To Assess Risk in Private Company Deals

Growthink blog

Written by Jay Turo on Monday, March 16, 2009

By far the biggest aspect of private company investing, which causes severe hesitation on the front end and sleepless nights on the back end, is risk.

All of us, of course, are profoundly interested in getting early stakes in high-flying companies but are downright frozen in our tracks by the considerable risk-taking involved in actually doing so. And once invested, the hard realities of company-building quickly take hold:. These include: longer than expected times-to-market, lower than expected cash flow, harder to attain market recognition, etc...

... The intelligent investor views risk simply as a measurement of the likelihood of a set of future outcomes, or of probability.

There are three main drivers of the probability of success: 1. Technology Risk. Can the enterprise actually bring-to-market the product or service as designed and on what timeframe?

2. Market Risk. Once the product is in the market, will anyone care?

3. Execution Risk. Can the the people of a business manage its technology and market risk to build brand, asset, revenue, and most importantly, cash flow growth over a sustained period of time?

... Suffice to say for now that risk for any business is driven not by the addition of these factors to one another, but by their multiplication to one another. Lack of performance on any one of the above has an exponential impact on a business' overall risk profile. ...

... For now, I will close with the words of perhaps the greatest entrepreneur of them all - Thomas Edison - who once said, "Restlessness and discontent are the first necessities of progress."

Five Ways to Fix Up Your 401(k) Plans

WSJ.com

By ELEANOR LAISE

In the midst of a market meltdown and economic crisis, many Americans' 401(k) retirement plans are looking a bit bedraggled. But some tender loving care from plan participants, employers and policy makers can help spruce up these accounts. ...

Tim Foley

Lawmakers and employers already are looking at ways to improve the 401(k). ... But you don't have to wait for change to come.

You, your boss and Congress can start fixing up 401(k) plans today. Here's how:

1 Save till it hurts …

... Think you can't save any more? Ask your payroll manager to calculate what your paycheck would look like if you boosted your 401(k) contribution, suggests Christine Benz, director of personal finance at investment research firm Morningstar.

"The percentages might seem daunting, but if you look at it in dollar-and-cents terms, you might find it's something you could easily implement," says Ms. Benz.

2 … Even with no match.

... If your employer has suspended the match, you should boost your own contributions to make up for it. Together, the employee and employer should contribute at least 10% to 15% of the worker's salary to build a healthy nest egg, retirement experts say.

The maximum amount most workers can contribute to a 401(k) this year is $16,500. Workers age 50 or older can contribute an additional $5,500.

3 Set it and forget it.

Sharp market swings can lead 401(k) savers to make some poor investment decisions, like fleeing stock funds simply because they've taken a dive. Investors who dump stocks at depressed levels lock in losses that could take a big bite out of their savings.

People who leave the asset-allocation decisions in the hands of a professional don't have to worry about making emotional investment decisions in rocky markets. ...

4 Pay attention to fees.

Hefty fees can put a lot of cracks in your nest egg. ... You should be able to see the total dollar amount you're paying in plan fees so you can compare the 401(k) and other savings vehicles such as an IRA, Ms. Benz says. ...

5 Get more workers saving.

Many companies don't offer 401(k)s, and many workers who do have the opportunity to invest often simply don't.

More and more employers are automatically enrolling workers. But many of these efforts focus only on new hires. They should also include existing employees. What's more, many workers don't have access to a 401(k). The costs and administrative burdens can be daunting for small businesses.

One solution might be for the government to make it easier for small employers to band together to offer workers 401(k)s, says Paul Stevens, president and CEO of the mutual-fund industry trade group the Investment Company Institute.

Email: forum.sunday03@wsj.com