Charles Blair, DDS
John McGill, MBA, CPA, JD
I have been incorporated for a number of years. When I first incorporated, my CPA told me that since I was now operating as a corporation, I was required to report my income and expenses on an accrual, rather than cash, basis. At the time, I did not understand the significance of this. My practice has been growing over the past few years, and I have been forced to pay income tax on production done but not yet collected. My CPA told me that, once I was set up this way, it could not be changed. What can I do?
The first step in the process is to switch to a new CPA. Any CPA who does not know and understand that dental corporations that meet the gross receipts tests can operate on a cash basis of accounting does not deserve to be your CPA. Accordingly, I would contact other dentists in your area, or your local attorney, to get references of prospective CPAs. Then, interview them before making your final choice.
Once you have selected a qualified CPA, the next step is to request a change in accounting method from the IRS by filing Form 3115. Before doing so, you should make sure that your new CPA deducts all of the amounts previously produced, but not collected, as a bad debt on your final corporate tax return filed under the accrual tax method.
Once the IRS consents to your change in accounting method, you will be able to report income as collected (rather than produced) and deduct business expenses as they are paid (rather than as they are incurred). This will give you more control over your taxable income.
Recently, I had a frozen Keogh plan that was terminated. My cash balance was distributed to me. I used these proceeds to buy stocks. Within 60 days, I had the stocks reissued in the name of the IRA to avoid any gain on the rollover. Now, my CPA is saying that I must pay taxes on this distribution. This can`t be so; all of the money is in an IRA, and I never used any of it. What`s going on here?
Unfortunately, your CPA is correct. The depositing of stock purchased with Keogh cash distributions into a new IRA does not qualify as a tax-free rollover under Section 408(b)(3) of the Internal Revenue Code. The law requires that if money is distributed, the money itself, and not stock purchased with the proceeds, must be recontributed for there to be a valid rollover.
I was audited on my 1993 federal income-tax return a few years ago. After the audit was over, the IRS failed to send me a notice regarding the amount owed, including interest, for a period of several years. When I finally received the bill, it was enormous. I do not feel that the IRS should penalize me due to the delay, while the interest and penalty clock was running at full steam. Is there any possibility for relief here?
The Internal Revenue Code Section 6404 provides situations where interest can be forgiven if it is due to unreasonable errors or delays by an IRS employee. For more information, see Regulation 209276-87.
I incorporated my practice in January 1998 and understood that my CPA was going to file for S corporation status. It turns out that whatever form was required to be filed with the IRS to elect Subchaper S status was not filed on time. What should I do?
Under Section 1362(b)(5) of the tax law, your CPA should request "corrective action" relief by filing a late S corporation election as soon as possible. Provided that the S corporation election is filed less than six months late, your request automatically will be granted. If your request is six months or more late, the IRS still can grant it upon a showing that there was reasonable cause for filing late.
Dr. Blair (left) is a nationally known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($149 a year) and consulting information are available from Blair/McGill and Company, 4601 Charlotte Park Drive, Suite 230, Charlotte, NC 28217 or call (704) 523-5882.