What is a PCAOB audit, and how is it different from a private-company audit?

The Public Company Accounting Oversight Board was created by the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies. Any firm that audits a company whose securities trade on U.S. markets must be registered with the PCAOB, and the engagement follows PCAOB auditing standards rather than the AICPA standards that govern a private-company audit.

The PCAOB audit vs AICPA audit difference shows up in three places. Independence rules are tighter, so the services you can buy from your audit firm are limited and the audit committee must approve them in advance. Documentation runs deeper, because anything not documented is treated as not done. And internal control over financial reporting, or ICFR, draws far more of the auditor’s time.

What does a PCAOB inspection involve, and why should you care?

The PCAOB inspects registered firms on a set cycle: every year for firms that audit more than 100 public companies, and at least once every three years for smaller firms. Inspectors review the auditor’s work on selected engagements; your financial statements are not re-audited.

You should still care, because inspection findings change auditor behavior. A firm whose documentation or ICFR testing drew comments will ask its clients for more evidence, earlier, the next year. A small public company that reads the current inspection focus areas can see those requests coming. The inspection is of your auditor, but the preparation is yours.

How do you prepare for a PCAOB audit? Start two quarters out

PCAOB audit requirements reward companies that spread the work across the year. A workable timeline for a small reporting company looks like this:

• Two quarters out: confirm the close calendar, refresh ICFR documentation for any process that changed this year, and assign an owner to every item on last year’s request list.
• One quarter out: review every service purchased from your audit firm against the audit committee’s pre-approvals, and let interim control testing start on schedule.
• Audit season: have reconciliations, support for estimates, and variance explanations ready before fieldwork begins, and route all auditor requests through one point of contact.

Most smaller reporting companies are exempt from the auditor’s attestation under Sarbanes-Oxley Section 404(b), but management’s own ICFR assessment under Section 404(a) still applies, so the documentation work stays on your list.

How RRBB’s New Jersey advisors help with PCAOB audits

RRBB is registered with the PCAOB and is a member of the Center for Audit Quality. Our RRBB advisors have served public companies across 60+ years of practice from offices in Somerset and Union, New Jersey, working with clients in New Jersey, New York and Maryland. The firm’s SEC and public company services team performs financial statement audits and interim reviews under PCAOB standards, along with Sarbanes-Oxley Section 404 compliance work, backed by RRBB’s broader audit and assurance services. As an independent member of PrimeGlobal, RRBB brings the expertise of a large firm while still serving clients with personal attention. Our guide to audits, reviews and compilations explains where a PCAOB audit sits on that ladder.

How do I prepare for a PCAOB audit as a small public company?

Start two quarters before fieldwork: confirm the close calendar, refresh internal control documentation, assign an owner to every expected request, and clear independence and pre-approval checks with the audit committee before interim testing begins.

What is a PCAOB audit and how is it different from a private-company audit?

It is the audit of a public company, performed by a PCAOB-registered firm under PCAOB auditing standards. Compared with a private-company audit under AICPA standards, it carries stricter independence rules, deeper documentation requirements, and more work on internal control over financial reporting.

What does a PCAOB inspection involve?

Inspectors review a registered audit firm’s work on selected engagements, every year for firms auditing more than 100 public companies and at least every three years for smaller firms. Your company is not the one inspected, but the findings shape what your auditor asks of you next season.

What should a small public company look for in an audit firm?

Confirm PCAOB registration, read the firm’s latest inspection report on the PCAOB website, and ask who will staff the engagement day to day, how the firm approaches ICFR work for smaller reporting companies, and whether partners are reachable at your reporting deadlines.

Audit planning for next fiscal year is being decided now. Contact our RRBB advisors at (908) 231-1000 or through rrbb.com/contact to talk through your situation.

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When is the tax filing extension deadline in 2026, and what has to be in?

October 15, 2026 is the extended filing deadline for 2025 individual returns. A tax extension form (Form 4868) filed in April bought you six extra months to file. E-file by midnight on the 15th, or postmark a paper return that day.

The tax extension deadline for business returns is split. Calendar-year C corporations that extended also file by October 15, but partnerships and S corporations had until September 15, which has passed. A missed pass-through deadline builds penalties per partner, per month, so talk to your advisor now.

What happens if you miss the October 15 tax deadline?

The failure-to-file penalty runs 5% of the unpaid tax for each month, or part of one, that the return is late, capped at 25%. Once the return is more than 60 days late, the minimum penalty is the smaller of $525 or 100% of the tax due. The failure-to-pay penalty is 0.5% per month, a tenth of that rate, which is why filing on time matters even when you cannot pay.

Interest accrues on top of both penalties at the federal short-term rate plus 3%, compounded daily. If the IRS owes you a refund, there is no failure-to-file penalty, but you have three years from the original due date to file and collect it.

If you already missed the tax extension deadline, file as fast as you can. Each new month, even a partial one, adds another 5% until the cap.

The extension gave you time to file, not time to pay

Payment for 2025 taxes was due April 15, 2026, extension or not. A balance you pay on October 15 has already picked up six months of the 0.5% monthly failure-to-pay penalty plus daily interest. That surprise drives the worst decision of extension season: skipping the return because you cannot pay the number on it, trading a 0.5% monthly penalty for a 5% one.

File, then deal with the balance. Pay what you can with the return to shrink the base the penalties grow on. For the rest, you may qualify for an IRS short-term payment plan of up to 180 days, a monthly installment agreement for larger balances, or in some cases an offer in compromise. Our advisors work with IRS payment plans and back taxes owed, and our guide to handling an IRS notice explains what to do when the first balance-due letter arrives.

How RRBB’s New Jersey advisors help with the tax extension deadline

Our RRBB advisors have worked extension seasons for 60+ years from offices in Somerset and Union, New Jersey, serving clients across New Jersey, New York and Maryland. In deadline week, the firm’s business tax planning and preparation and individual tax planning and preparation teams focus on a complete return filed on time and a clear read on your payment options if there is a balance. As an independent member of PrimeGlobal, RRBB brings the expertise of a large firm while still serving clients with personal attention. Once the return is in, the moves in our year-end tax planning guide are worth more before December 31 than after, and an advisor can walk you through which ones fit 2026.

What happens if I miss the October 15 tax extension deadline?

The failure-to-file penalty starts: 5% of your unpaid 2025 tax per month, up to 25%, with a minimum of the smaller of $525 or the tax due once you are over 60 days late. File as soon as possible to stop it.

Does a tax extension give me more time to pay?

No. Form 4868 extends the time to file, not the time to pay. Tax owed for 2025 was due April 15, 2026, and carries a 0.5% monthly failure-to-pay penalty plus daily interest until paid.

When is the extended tax filing deadline in 2026?

Thursday, October 15, 2026 for individual 2025 returns on extension and for calendar-year C corporations that extended. Partnerships and S corporations had until September 15, 2026.

What are my options if I can’t pay the taxes I owe?

File the return anyway and pay what you can. For the rest, you may qualify for an IRS short-term payment plan of up to 180 days or a monthly installment agreement; an offer in compromise may fit when the balance is out of reach.

One week is enough to finish a complete, accurate return if you start today. Contact our RRBB advisors at (908) 231-1000 or through rrbb.com/contact to talk through your situation.

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What’s the difference between an audit, a review, and a compilation?

All three produce financial statements. What changes is assurance: how much work the CPA does to verify the numbers, and how much confidence the report gives the person reading it.

An audit report gives an opinion, the strongest statement a CPA can make about financial statements, which is why it involves the most work of the three.

Review vs. audit: what does the CPA actually do?

In a financial statement review, the CPA studies the numbers for anything that looks off and asks management to explain it. If gross margin jumped five points, or receivables doubled while sales stayed flat, expect questions. The CPA does not confirm balances with your bank or test individual transactions.

An audit adds that verification. The auditor confirms cash and receivable balances directly with banks and customers, can observe your year-end physical inventory count, examines contracts and supporting documents, and evaluates the controls behind your books. The work often runs several weeks where a review runs days.

That difference in scope is why a review costs less than an audit, and a compilation less than a review. You are paying for procedures, and the useful question is which level of assurance the people reading your statements require.

Does your lender need reviewed financial statements, or something else?

The answer is usually already in writing. Loan agreements set reporting requirements in their covenants, in language such as “annual financial statements reviewed by an independent certified public accountant, delivered within 120 days of fiscal year end.” Pull your agreement and read the exact wording before you engage anyone.

If the wording is unclear, ask the lender three questions in writing: which level of service, how often, and due how many days after year end. Banks answer these routinely, and the written reply protects you if a covenant question comes up at renewal.

Timing matters most for audits. Some procedures, like observing the year-end inventory count, have to happen on the calendar, so engage before your fiscal year closes. Expect the requirement to move as borrowing grows: many businesses start with a compilation, step up to a review as credit lines expand, and face an audit requirement with larger facilities or bonding.

How RRBB’s New Jersey advisors help with audits, reviews and compilations

Our RRBB advisors have prepared compilations, reviews and audits for 60+ years from offices in Somerset and Union, New Jersey, serving businesses across New Jersey, New York and Maryland. The firm’s audit and assurance services cover all three levels, alongside SEC and public company services for businesses with reporting obligations, and its financial reporting support keeps monthly books lender-ready between report dates. As an independent member of PrimeGlobal, RRBB brings the expertise of a large firm while still serving clients with personal attention. If a lender’s request is on your desk, an advisor can read the covenant language with you and match the engagement to what it requires, so you buy the assurance the loan calls for and nothing more.

What’s the difference between an audit, a review, and a compilation?

They are three levels of CPA service on the same financial statements. A compilation provides no assurance, a review provides limited assurance based on analytical procedures and inquiries, and an audit provides an opinion backed by verification.

Does my bank need audited or reviewed financial statements?

Check the reporting covenant in your loan agreement; it usually names the required level of service and the deadline. If it is silent or unclear, ask your loan officer in writing which level the bank requires.

What does a CPA do in a financial statement review?

The CPA performs analytical procedures on the statements and asks management about unusual balances and trends, then issues a report giving limited assurance. A review does not include confirming balances or testing transactions.

Can a compilation satisfy a loan covenant?

Sometimes. If the covenant asks only for annual financial statements prepared by a CPA, a compilation may qualify. If it specifies reviewed or audited statements, it will not, and sending one anyway can put the loan out of compliance.

One careful reading of your loan agreement usually settles the question. Contact our RRBB advisors at (908) 231-1000 or through rrbb.com/contact to talk through your situation.

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What does your IRS notice number mean?

Every IRS notice carries a code, usually CP or LTR plus a number, on the first page. The code says why the IRS wrote, and irs.gov publishes a full list of IRS notices so you can look yours up. Three show up most often:

• CP14: the first balance-due letter. The IRS shows unpaid tax on your account and asks for payment within 21 days.
• CP2000: income reported on a W-2 or 1099 does not match your return. A proposed change, not a bill and not an audit, with 30 days to respond.
• CP22A: the IRS processed a change to your return, often one you requested, and the notice shows the new balance.

CP2000 notices cluster in late summer and fall, when spring filings are matched against employer and bank records. You can view many notices online through your IRS individual account, but not all appear there; the paper letter and its deadline govern.

What should you do in the first 30 days?

Most IRS notices give you 30 days, counted from the date printed on the notice, not the day you opened the envelope. A workable timeline:

• Days 1 to 2: read the whole notice and note the notice number, tax year, deadline, and amount.
• Days 3 to 7: compare the IRS figures line by line against that year’s return and your records. A CP2000 names the document it is matching, so you know where to look.
• Days 7 to 21: respond in writing. If the IRS is right, sign the response form and arrange payment. If not, explain why and attach copies, never originals.
• Before the deadline: send it by certified mail or the notice’s upload option, and keep a copy of everything.

If the balance is right but too big to pay at once, ask the IRS about an installment agreement early.

What should you not do when an IRS notice arrives?

Three mistakes turn a routine notice into an expensive one.

Do not ignore it. Interest and late-payment penalties keep building on any real balance, and an unanswered CP2000 can become a statutory notice of deficiency, a far less flexible track.

Do not pay just to make it stop. Matching notices are computer-generated, and the proposed figure can be too high. One common example: a 1099-B reports full sale proceeds and the CP2000 treats it all as gain, ignoring your cost basis.

Do not respond to calls, texts, or emails claiming to be the IRS. The agency opens nearly every case by postal mail, and anyone demanding gift cards or wire transfers by phone is running a scam. Use only the number printed on the notice or listed at irs.gov.

How RRBB’s New Jersey advisors help with IRS notices

With a signed power of attorney, Form 2848, a CPA, an enrolled agent, or an attorney can deal with the IRS on your behalf. Representation is worth considering when a notice involves an audit, a lien or levy, several tax years, or a figure you cannot reconcile.

Our RRBB advisors have answered these letters for 60+ years from offices in Somerset and Union, serving clients across New Jersey, New York and Maryland. The firm’s IRS representation and tax problem resolution services cover IRS audit representation, back taxes owed, IRS payment plans, offers-in-compromise, and IRS liens and levies. As an independent member of PrimeGlobal, RRBB brings the expertise of a large firm while serving clients with personal attention: a second set of eyes before you sign anything.

I got an IRS notice. Should I panic, or can I handle it myself?

No panic required. Most notices involve one issue and one tax year, and many need only a comparison against your return and a written reply by the deadline. Bring in a professional for an audit, a levy, or a number you cannot verify.

How long do I have to respond to an IRS notice?

Most notices allow 30 days from the printed date; a CP14 asks for payment within 21 days. The deadline on your letter is the one that counts.

What is a CP2000 notice?

A CP2000 is a proposed change, not a bill or an audit. Income reported by an employer, bank, or brokerage does not match your return, and you generally have 30 days to agree or dispute.

Who can represent me in an IRS audit in New Jersey?

A CPA, an enrolled agent, or an attorney can represent you before the IRS anywhere in the country under a signed Form 2848. Our RRBB advisors provide IRS audit representation from offices in Somerset and Union, New Jersey.

If a notice is on your desk, its clock is already running. Contact our RRBB advisors at (908) 231-1000 or through rrbb.com/contact to talk through your situation.

The post What to Do When You Get an IRS Notice (and What Not to Do) appeared first on RRBB.

Why does year-end tax planning start in September?

The most valuable tax moves have lead times, and most of them expire on December 31. A retirement plan needs documents drafted, signed, and funded. Equipment has to be delivered and placed in service; paying for it is not enough. Deferring income or accelerating deductions needs a projection, and a projection needs books current through the third quarter. None of that happens in one December phone call.

September gives you three and a half months of runway, eight months of actual results to project from, and enough pay periods left to adjust withholding gradually. It is the right month to build a year-end tax planning checklist: each move that might apply, its deadline, and what has to happen first. After December 31, almost every lever locks. IRA contributions are one of the few exceptions, and they stay open until the April filing deadline.

Three tax moves that only work if you start before Q4

Three moves reward an early start more than any others. Each has a hard cut-off and takes weeks to do well.

The pattern is the same across all three: the deadline is December 31, but the work starts earlier. Plan documents take weeks. Equipment can sit in a supplier’s backlog, and a machine delivered January 4 deducts nothing for 2026. Reviewing losing positions in the fall lets you space sales instead of rushing December trades.

Should you defer income or accelerate deductions this year?

The answer comes down to one comparison: your expected tax bracket this year versus next. If 2027 looks like a lower-income year, deferring income and accelerating deductions shifts taxable income into the cheaper year. If your income is climbing, the reverse can make sense: bill sooner, hold deductible spending, and use this year’s lower bracket.

Cash-basis businesses have the most control, which is why this lever sits at the center of small business tax planning. A December invoice can go out in early January, and planned purchases can move up into this year. For high-income earners, tax saving strategies deserve a projection rather than a guess: bracket thresholds, the additional Medicare tax, and the alternative minimum tax can each change the math. Run the numbers before you commit.

How RRBB’s New Jersey advisors help with year-end tax planning

At RRBB, year-end planning is a year-round habit, not a December scramble. For 60+ years our RRBB advisors have worked with business owners and families across New Jersey, New York and Maryland from offices in Somerset and Union. As an independent member of PrimeGlobal, RRBB offers the expertise of a large firm while still serving clients with personal attention.

A fall planning conversation looks at the whole picture. Business tax planning and preparation covers projections, timing moves, and the January 15 estimated payment. Individual tax planning handles withholding, harvesting decisions, and charitable timing. Retirement and financial planning helps you choose and establish the right plan before the December 31 cut-off. If you run a business in Somerset, Union, or anywhere in central New Jersey, September is the month to get on the calendar.

When should I start year-end tax planning for my business?

September. That leaves eight months of results to project from, three and a half months to execute, and time to meet retirement-plan and equipment deadlines.

What tax moves have to be done before December 31?

Establishing most employer retirement plans, placing equipment in service, harvesting investment losses, making charitable gifts for a 2026 deduction, and nearly all timing moves. IRA contributions are the main exception; they stay open until the April filing deadline.

Should I defer income or accelerate deductions this year?

Defer income when you expect a lower bracket next year, and consider the reverse when your income is rising. Run a projection from your year-to-date numbers before you commit either way.

What is the deadline to set up a retirement plan for tax year 2026?

It depends on the plan. A solo 401(k) generally needs to exist by December 31, 2026, while a SEP can be set up as late as your 2026 filing deadline, including extensions. Ask your advisor which fits your payroll and headcount.

The runway only helps if you use it. Contact our RRBB advisors at (908) 231-1000 or through rrbb.com/contact to talk through your situation.

The post Year-End Tax Planning Starts in September, Not December appeared first on RRBB.

Potential tax breaks

1. Qualified charitable distributions. If you’re age 70½ or older, you can transfer up to $111,000 (or a total of $222,000 for joint filers) directly from your IRA to a qualified charitable organization without paying any tax. Because distributions done this way are not subject to federal tax, it’s like contributing with pre-tax dollars. Plus, your contribution counts as a required minimum distribution for tax purposes.
2. Appreciated securities. Donate appreciated property (like securities) to a qualified charity, and you can deduct the current fair market value (FMV) of the property if you’ve owned it longer than a year. For example, if you acquired stock three years ago for $7,500 and it’s now worth $10,000, you can donate it and deduct the entire $10,000 FMV if you itemize your deductions. There’s no capital gains tax on the $2,500 appreciation in value ever! This is a great strategy if you are close to or over the itemized deduction threshold in a given year.
3. Bunching donations. Under current tax law, the standard deduction is more than double the historic rates, effectively lowering the number of taxpayers who will itemize their deductions. As a result, it now makes sense to “bunch” large gifts of property, like securities (see #2), in a tax year in which you expect to itemize. Conversely, if you don’t anticipate itemizing in the current tax year, you may consider postponing donations into the next year. The idea is to get the most tax deductions possible over a multiyear period.

Charitable deduction ideas

• Consider a Donor Advised Fund (DAF). This idea is to be used in conjunction with tips 2 and 3. With this idea, you create a Donor Advise Fund. You then donate appreciated assets (stocks) into the fund (tip 2). You donate enough in one year to exceed the standard deduction for that year (tip 3). You then donate your funds out of the DAF over the years. While the money is no longer yours, you still control which qualified charities receive it. Note: You cannot use a DAF to qualify for the new, non-itemized charitable giving rule outlined in tip 4.
• Leverage the new charitable deduction rule. Beginning in 2026, you can now directly deduct charitable contributions without itemizing. The amount is $1,000 ($2,000 for a married filing joint tax return).

With each of these ideas, it’s essential to follow the rules when donating. If not, your good intentions may not be deemed a qualified donation for tax purposes. Contact our RRBB advisors if you’d like to review your situation.

The post Great charitable deduction ideas appeared first on RRBB.

Toss this, not that

• Keep a copy of your Form 1040 indefinitely. Do not toss or destroy any of your 1040s. You may need them to correct historic Social Security earnings statements or to prove that you filed a tax return.
• You must retain supporting documents for three years. Records to support your tax return (i.e., W-2s, 1099s, K-1s, receipts, canceled checks, bank statements, and mileage logs) should be kept for a minimum of three years from the later of the tax filing due date, the date you filed your taxes, or the date you paid your tax in full. This approach ensures that your records are available for a potential IRS audit.
• Hold onto property and investment records longer. To prove your cost/basis and taxable gain or loss, all records relating to property that you own (your home, rental properties, stocks, bonds, and other investments) need to be kept for at least three years after it’s sold or disposed of.
• Be mindful of other record retention requirements. The three-year period is the federal guidance for standard returns. There are other factors to consider, including:
  • State record retention requirements (often six months to one year longer)
  • Requirements for insurance, banking or estate management
  • W-2s to confirm and defend your historic Social Security earnings statement
  • Additional federal requirements for tax returns including unreported income (six years), worthless securities (seven years) or bad debt (seven years)
  • No audit time limit for fraudulent returns
• Pay special attention to new rules. Remember this past year was the first year for tax-free tips and tax-free overtime. Pay special attention here to ensure you can defend your deduction with employer or vendor documentation. And in 2026, the above-the-line charitable contribution will need proof to take the deduction.
• A specific filing system is not a requirement, but organization is key. The ability to easily locate your documents during an audit will make the process much simpler. Here are some tips:
  • File records by year rather than income or deduction type.
  • Within the file, order your records to match the flow of the Form 1040.
  • Consider scanning your files to create a digital backup.
  • Create 2026 files now to save documents for the current year.
  • Shred old documents; don’t just throw them away.

Post-tax-filing record retention

If you are unsure whether to retain or shred a document, keep it unless you know that you can replace it. Contact our RRBB advisors today if you have questions or need assistance.

The post Your guide to post-tax-filing record retention appeared first on RRBB.

The value of the gift

When you gift stock, there are not one but two values to consider.

1. Gift value. This is the market value of the stock at the time of your gift. Since there is a possible gift tax to you if the value of all gifts given by you to a person during the year is $19,000 or over ($38,000 for a married couple), you will need to calculate this value prior to finalizing your decision to provide the gift.
2. Value (basis) of the stock. You need to determine the cost to you at the time you originally purchased the shares. This includes any brokerage or other fees. Provide the date(s) you purchased the stock and these costs to the person who will be receiving the gift.

Providing important information

Basis is key. Those receiving your direct gift of stock are not required to sell it. But when they do, they will need to know the following:

• The original cost of the stock and when it was purchased
• The date and fair market value of the stock when it was given
• If the giver paid any gift tax

Timing is important. If the recipient of your gift sells the stock right away, the tax rate applied will depend on the length of time the stock was owned by you. A gain on a stock held one year or less is considered ordinary income. More than one year is a long-term capital gain. The time frame for this calculation usually goes all the way back to your purchase records.

The benefits of gifting stock

• No taxes. Gifts of stock allow you to avoid paying capital gains tax on the ownership transfer. As long as annual gift amounts to one person are less than $19,000 ($38,000 for a married couple), there is no tax consequence.
• Lower taxes. In addition, the future sale of the stock could result in lower taxes. This is because long-term capital gains tax rates can range from 0% to 20%. Short-term capital gains tax rates can be as high as 37%. An additional 3.8% Medicare tax or net investment income tax may also apply. Assuming your child or grandchild has lower income than you, the resulting sale creates a potential tax savings. Care must be taken if the gain is high, as the Kiddie Tax rules could create a tax bite at the parents’ tax rate.
• Kiddie Tax benefit. If the gift stock pays dividends, future dividend income can potentially be taxed at your recipient’s lower tax rate. This technique can be used to provide dividend income without a child having to pay any taxes up to the Kiddie Tax annual limit in 2026 of $2,700 ($1,350 of unearned income is tax-free, and the next $1,350 is taxed at the child’s tax rate).
• Gift to anyone. Your gift can be provided to anyone you wish, not just a relative. These gift rules also apply to other investments, such as mutual funds, land, and other property.

Some wrinkles when gifting stock

1. If your stock is losing value, it is usually better to sell it and take the tax benefit of the loss. If the stock you gift has a fair market value less than your cost, providing the information noted here to the recipient of your gift is even more important.
2. It is no longer your property. When gifted, it is owned by the recipient. This is not a problem for your child, but it could be if it is a grandchild or if the child reaches adulthood. So a grandchild going through a parent’s divorce could create an interesting scenario.
3. This property could impact future aid. If your gift is to a child and the funds are intended for future educational needs, the value of the stock could affect the amount of federal aid they receive.

Please ask for help if you are considering a gift of stock or property. If handled incorrectly, your gift could create unforeseen tax consequences. But when used in conjunction with other contribution techniques, it can be a powerful tax-planning tool. Contact our RRBB advisors today.

The post A gift of stock appeared first on RRBB.

Errors in the IRS’s favor

Errors discovered that result in an additional tax obligation must be corrected by filing an amended tax return. This is especially true if the discovered error is due to missing information on a Form 1099 or a Form W-2. Why? This information is being reported to the IRS, and matching programs will typically catch the error. The sooner you amend your return and pay the tax, the lower the possible interest and penalties.

Errors that result in a lower tax liability

If correcting the error or omission results in a large additional refund, the answer is usually obvious. File the amended return. But this is not always the case.

• There can be an extension period of time during which the IRS can audit your tax return. Federal tax returns are typically subject to audit for three years after the original tax return due date or the date the return was filed, whichever is later. If you file an amended tax return, the audit clock may change based on the amended return filing date and degree of change requested. It may trigger an IRS request to extend the audit review period. The refund also resets the IRS’s erroneous refund recovery statute, adding another 2 to 5 years during which the IRS can review the refund, based on the date of the latest tax return refund.
• The amended return may be examined. Amending a tax return puts a spotlight on your tax return. The IRS has certain topics that trigger individual examinations for amendment requests. Amended tax returns based on things like the Earned Income Tax Credit, Qualified Business Income Deduction, and the Research Tax Credit for small businesses could result in a visit from your local IRS examiner. Because of this, keep all the necessary records to substantiate your amended tax return close at hand.
• Amending one tax return may require amending several other returns. Making a minor change in one year may require you to make changes in other tax years. Is it worth it?
• Don’t forget other taxing authorities. Making a change on your federal tax return may require you to file an amended state or local tax return. Do not assume that an amendment in your favor at the federal level will necessarily also be in your favor at the state and local levels.
• Don’t expect the refund to be timely. The process of amending a tax return can take a long period of time. There have been cases where the IRS has delayed the initial review of an amended return for more than a year, only to decide to examine the return. While not typical, the process could take up to 18 months to resolve.
• Timing is important. Remember, there is also a time limit for requesting a change to your tax return and receiving an additional refund. This is typically three years after the initial filing deadline of the tax return. Make sure you file these tax returns using certified mail. Should the IRS delay responding to your amendment, you may need to prove the timing of it.
• You have a chip in your pocket. If the refund amount is not large enough to justify an amended tax return, keep the documentation anyway. Should you receive an audit letter, you can often present your case at that time to offset any additional tax.

To amend a tax return

While finding an error or omission on your tax return can be unsettling, rest assured there are ways to fix the problem, but it is often worth taking a balanced approach to determine the best solution. Contact our RRBB advisors today if you have questions or need assistance.

The post Is it always a good idea to amend your tax return if you find an error? appeared first on RRBB.

Know whether you’re an employee or an independent contractor

Many contractors and freelancers assume they’re taxed the same way as at their day job. Then tax season arrives, and they discover no one was setting aside money for Social Security, Medicare, or income taxes. In some cases, it is surprising to learn they were in a different classification than expected.

Before accepting additional income, ask about the method of payment and whether you’ll receive a Form W-2 or Form 1099. A short conversation upfront can prevent a much longer conversation when you prepare your tax return.

Employee income isn’t always simple

Your employer withholds Social Security and Medicare taxes from your paychecks, which makes payroll taxes feel largely automatic. The problem starts when you add a second job or other side income. Each employer calculates withholding as if it’s your only source of income, which can leave you short when the sum of everything together is on your tax return. Some workers may also receive tax forms other than a traditional W-2, creating another opportunity for confusion.

You must review your withholdings whenever you add a new income stream. A quick check during the year is much easier than finding out in April that your paycheck withholding wasn’t keeping pace with your total earnings.

Contracting income means more responsibility

Receiving a 1099 often feels very different from receiving a paycheck because there are no tax withholdings occurring along the way. You’re responsible for both sides of Social Security and Medicare taxes, which can make the final tax bill larger than expected. Mixing business and personal spending can also make it harder to identify expenses that could reduce taxable income.

Keep business income and expenses separate from personal spending, whether that means opening a dedicated account or tightening up the one already in place. And if additional income becomes regular, build estimated tax payments into the routine instead of treating them as a year-end problem. A quick estimate during the year can help decide whether quarterly payments make sense.

Avoiding issues that come with adding extra income

Extra income can create new opportunities, but it also introduces new tax responsibilities. A little planning now can help keep more of what you earn and prevent unpleasant tax surprises later. Contact our RRBB advisors if you have questions about your extra income.

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