Corp Precautions & Meetings

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Client Letter - What this idea is about

Usually we will perform procedures that are used to reduce the chances of an Internal Revenue Service audit and reduce the possibilities of Internal Revenue Service successful challenges to your tax return.

Due to the incomplete information furnished to prepare your tax return there was no possibility to apply this firm�s normal procedures to assist in quality assurance, or the diminishing of Internal Revenue Service audit selection or diminishing the possibility of successful Internal Revenue Service audit challenges.

Please Know and Understand the Internal Revenue Service Methods

The Internal Revenue Service does not audit or examine a tax return. There is a common misconception the Internal Revenue Service audits a �tax return�. The Internal Revenue Service does no such thing. The Internal Revenue Service examines your bank records, the deposits, the canceled checks, savings accounts, broker accounts, investment accounts, property tax records, what you own and what you owe to others and debt you are paying off. An examination, if one were to occur would include (but not be limited to) the Internal Revenue Service looking at paid bills, canceled checks, lease agreements, promissory notes and similar records � from your records and if necessary it would obtain copies from other sources by contacting the other sources directly.

What the Internal Revenue Service looks at for income

The Internal Revenue Service will look at the banking records. Should it become necessary, the Internal Revenue Service has the authority to obtain copies of those records directly from a bank or other financial institution. The Internal Revenue Service would expect to find all deposits listed in the tax records and all deposits shown on corporate records or other records � and shown as income. If deposits are not income, the rules require the taxpayer to prove the receipt was not taxable. This is done by having explanation of all money and deposits. Not all deposits are taxable. Examples are loans, transfers, transfers between accounts, transfers from savings, transfers from investment accounts, gifts, re-deposits of bad checks from customers, refunds and other similar items. Furthermore, there are specific types of income deposited that should not be included in income � such as tax free municipal bonds, draws from sole proprietorships, draws from partnerships, etc.

If the income on a tax return, such as a business type return (corporation or sole proprietorship) does not match the total of the additions to the bank statements, or other financial accounts, then one must be prepared for a battle with the Internal Revenue Service. Whether the Internal Revenue Service makes the adjustment. or your adviser is successful with representing you in the matter, depends upon your records and explanation of the deposits - you the taxpayer did not show on the tax return�s income.

How the Internal Revenue Service Looks at Your Tax Deductions & Expenses

The statement �The Internal Revenue Service examines the tax records, paid bills and bank statements�� cannot be overstated or stated too many times. As with income, the Internal Revenue Service will look at bank statements and other financial institution or investment records {canceled checks and paid bills}. The Internal Revenue Service will always ask for each, and will require the bank statements to be produced. Sometimes if canceled checks are not available, the combination of the bank statement and the paid bills will meet the Internal Revenue Service request. The Internal Revenue Service will always look for reasons to disallow a deduction � that is what the examiners are paid to do. There is a popular misconception that the taxpayer is not required to produce the canceled checks and paid bills. That is not true. The rules are written so that the �burden� is on the taxpayer � not the government auditor. The rules are written so that without proof, the examiner is authorized to disallow the deduction entirely and sometimes make it taxable to both a corporation and a shareholder (double taxation).

In general the Internal Revenue Service will look at the total amount of checks as shown on the bank statement. The examiner will expect that the total of the expenses will not be the same as the checks, but generally will not exceed the amount of the checks. There are valid and just reasons for the amount of the deductions to vary either way. However, there must be adequate explanation. Explanation will be paid bills, canceled checks and other documents.

Both income and deductions have now been covered briefly. Please note sources the Internal Revenue Service examiner uses are the records from banks, financial institutions, Brokers, and other accounts such as mutual funds statements. The examiner will want to match the deposits with reported income and the checks with reported deductions. If the tax return does not match closely the banking and other records ~ the Agent will reconcile the detail and the totals. Without adequate proof to prove deductions and proof to establish money received is not income the taxpayer faces a difficult battle.

There can be hidden dangers �

The hidden dangers are too numerous to make a complete list for this document. Therefore, only one example shall be chosen. The point of the example is that there may be many hidden dangers, or there may be many methods the Internal Revenue Service examiner uses routinely the general public does not know about or imagine. In this section the use of banking and other records has been covered fairly extensively. However the examiner has access to many other records at the �push of a computer button�. The general public is not aware the examiner has access to:

Credit reports,

State income tax returns and other state filings,

Balances in retirement plans,

Balances in IRA and similar accounts,

Changes in the balances of the above,

Can compute balances in investment accounts, number of shares held, balances in savings accounts, etc. by using the amount of income reported by the taxpayer or by the payer of the income and the rate of payment � such as dividends per share, interest rate, etc.

The Internal Revenue Service routinely reads trade journals, professional publications and journals, etc. and makes notes of professionals that are disciplined or large awards, or any other item the Internal Revenue Service believes is noteworthy and at times chooses to examine those individuals,

The Internal Revenue Service at times may have individuals making notes and making reports based upon information gained when the Internal Revenue Service person is on personal time � such as shopping, eating out, golfing, etc. (Many years ago I was in a waiting line at a hobby shop to check out. There were two individuals in front of me. The individual checking out was commenting about earning �cash income� and not needing to report it on a tax return. Of course the income must be reported on a tax return. Here is the punch line � I knew the individual immediately in front of me � that person was a Collection Officer for the Internal Revenue Service!)

Another source of information is the federal reserve system. Any business or person receiving cash over a certain amount is required to report the transaction directly to the Internal Revenue Service,

Another is the general public � the Internal Revenue Service has a system in which it offers cash rewards leading to anyone not properly reporting income.

The biggest hidden danger however lies with one�s own walls. That danger is inadequate or improper documentation. For example: One area the Internal Revenue Service enjoys challenging is the category of car, transportion, travel and meals expenses. Most taxpayers do not follow all the prescribed rules. The examiner knows the rules are burdensome and has had previous experience in this area, knowing it is an easy area to challenge. (Please visit my website to find how I can represent you in this matter � see http://www.pro1040.com/car_law_requirements.htm If a person has a C Corporation, there can be a catastrophic event. MAGNATUDE 7+! If car expenses are paid from a C Corporation for the owner ~ and the logbooks, etc. do not meet the Internal Revenue Service requirements, the Internal Revenue Service can challenge and will �probably� be at least partially successful. The Internal Revenue Service can charge - double taxes and double interest and double penalties. The Internal Revenue Service can charge both the C Corporation and the Owner!

Corporate Formalities

Corporate formalities are not difficult � just time consuming. Generally the taxpayer has chosen to incorporate for valid reasons and in many cases incorporation may be essential to a sound business plan (not just a tax plan). I shall not cover all the formalities of the corporation � only a few. Hopefully this will help to keep the business on the correct track and be a reminder to check all these and the other elements necessary for establishing and maintaining corporate status:

� Corporate Minute Book must be kept current (i.e. if bank account is changed update the minute book)

� All transactions between the owner and the corporation must be documented in the minutes and a proper filing system of third party papers must be maintained

� One is advised to make reimbursements to the owner by using and accountable plan. The non-accountable plan is not any less work and many deductions are lost by using the non-accountable plan.

� The personal checking and the corporation�s checking must be kept separately. Do not commingle personal and corporate business.

� Depreciable property (equipment, major repairs, real property, office equipment, appliances, etc.) records must be complete and in a permanent file.

� Officer (or owner) life insurance is not deductible by the corporation � unless the amount of the premiums are included on a W-2 filled out for the officer (owner).

Closing

The above statements must not be read with a solid conviction the worst case scenario will come true.

It is a fact that we cannot know the future and none of us must be allowed to speculate.

One must read the preceding paragraphs with a new understanding of the expectations of the Internal Revenue Service and the responsibilities of the taxpayer. Furthermore, one is now armed with knowledge so that proper actions can be taken before any �worst case scenario� looms.

I cannot and shall not speculate what the Internal Revenue Service might do in the future, nor speculate what the results of any Internal Revenue Service challenge might be.

I shall inform you this firm has a solid background and many successful experiences in representing taxpayers. Making the assumption you will continue to engage us for your tax preparation services and related matters, and engage us to represent you - should the future bring am unwanted event, then you will be represented by a professional with the knowledge and experience to assist you. (The representation will be a new engagement and charges will be based upon the rates at the time of engagement.)

Engagement Letter

This entire site is for educational or informational purposes only. You are not to use the forms, concepts, strategies, or knowledge without assistance from a professional. The author, the corporation, the ISP, Bob Parrish CPA, Bob Parrish CPA, P.C. or other parties related to those or this site do not guarantee or warrantee in any manner the suitability, usefulness, accuracy, timeliness, or results of any portions of this site, nor the links contained in this site which link to other areas. At times, information is taken from other sources and is believed to be accurate, but no verification or confirmation is performed. Furthermore, if any federal or state law invalidates a portion of this disclaimer, the other portions still apply. In addition, any allegations or actions are restricted to arbitration only and must be arbitrated by the Better Business Bureau in Sarasota Florida. Reading of these pages constitutes complete acceptance and agreement with all disclaimer provisions on all pages of this site. .......

Learning Objectives

What it does, Why it works - Plain English Analysis

What It does, Why it works - Technical Analysis & Citations

Tax Killers

This is about Activity Based Taxplanning - maximizing deductions, minimizing cash outlay and maximizing the amount of cash retained and the net worth.

Tax is a subject that many view in order to cut costs. Taxes are a cost just as any other cost. It happens this cost is somewhat intangible and is defined by legislation without a tangible item to view and control. The money is spent and the control of the expenditure is more appropriately administered by someone trained in the law.

Cost Killers

This is about Activity Based Costing - methods to cut costs, management accounting, management information systems, decision support systems - in general about being a manager.

What to gather - preparing for your CPA, your attorney, or preparing to start the job on your own

Assistance - What To Do - Forms - checklists, time-line to do, etc.

The State Business Corporation Law and the Corporation's Bylaws requires your Corporation to hold an annual meeting each year. The Board of Directors must fix the annual Shareholder's Meeting. I suggest the following: __________ [time], __________ [date]. I have prepared the enclosed Notice of Meeting, and an Affidavit of Service which is required by the Corporation's Bylaws.

Immediately after the Annual Shareholder's Meeting, you should conduct a meeting of the newly elected Board of Directors. Both the Annual Shareholder's Meeting and Board of Directors Meeting may be conducted by phone for those who cannot physically attend. The minutes of the last Annual Meeting must be read and approved by the Shareholders.

The newly elected Board of Directors, which is elected by the Shareholders, should meet to elect new Corporate Officers and set their compensation as well as approve the Minutes of the last prior meeting of the Board of Directors. At this meeting it would be wise for the Board to review employment contracts and other obligations of the Corporation. It would also be a good time to review, revise and modify employee benefit programs such as life insurance, disability, major medical, stock option plans, and the like.

It is important to conduct the Annual Shareholder's Meeting and make a record of the meeting. Failure to hold the Annual Shareholders' Meeting and the annual Directors' meeting may have grave legal and tax consequences.

Please contact me so that we may prepare an agenda and organize your annual meeting.

Preparing Corporate Minutes

Traditionally, owners of closely-held corporations tend to see the required annual meeting as a nuisance. Indeed, the minutes of these meetings often reflect that little more was discussed than the fact that the meeting was held and that officers and directors were elected. While it is important to make sure the corporation is respected as a separate legal entity, it is also important that corporate minutes reflect discussions and decisions that support the positions taken by their owners.

Important actions may include the accrual of bonuses, retirement plan contributions and the ratification of key actions already taken by the corporate officers. To ensure that desired tax results are achieved, we list below some examples of situations where complete and detailed corporate minutes are necessary:

� The Internal Revenue Service (IRS) often attacks the compensation of closely-held C Corporation shareholder/officers as unreasonable. The Internal Revenue Service will claim the compensation is unreasonably high. If your minutes are well drafted and outline the responsibilities, skills and experience levels of the officers, you can significantly reduce the risk of an IRS challenge. This is especially true if shareholder/employees are underpaid in the start-up years of an organization because of lack of available funds.

� The Internal Revenue Service (IRS) often attacks the compensation of closely-held C Corporation shareholder/officers as unreasonable. However, the Internal Revenue Service will usually attack the compensation as being unreasonably low when the entity is an S Corporation. There must be some compensation paid to the owner. Furthermore there must be logical circumstances for the compensation.

� In order to deal with Section 531 Excess Accumulated Earnings Tax, companies that anticipate accumulating substantial funds inside the corporation should include information in their minutes that spells out the need to accumulate earnings for specific future business needs.

� Additionally, because the IRS often challenges business owners regarding loans which the IRS contends are disguised dividends, recording the approval and terms of such loans to shareholders in the minutes will strengthen your position should the IRS challenge.

� Because many buy/sell agreements call for an annual valuation by the Board of Directors, the results of such annual valuations need to be reflected in the corporate minutes.

Although the annual meeting date is typically set by the bylaws as 12 months after the date the business was incorporated, it sometimes makes sense to move the date to within one or two months before the corporation's tax year end. By doing this, the meeting can be used as a tax planning session. The current year's business operations can be reviewed, the legal and tax advisors of the corporation can meet and tax planning needed before year end (such as establishing a qualified pension plan, setting up fringe benefit programs, etc.) can be accomplished.

Spreadsheets & Computations

Contracts, Trusts, etc.

The annual meeting of shareholders of the corporation was held at __________ [time] on __________ [date].

The meeting was called to order by __________ [name], the __________ [specify office] of the corporation. __________ [name] was appointed secretary.

The secretary thereafter reported to the shareholders that the meeting had been called pursuant to __________ [a notice of meeting and/or a waiver of notice thereof] in accordance with the corporation's bylaws. It was ordered that a copy of __________ [the notice of meeting and/or the waiver of notice thereof] be appended to the minutes of the meeting.

The secretary then read the roll of shareholders from the corporation's stock transfer ledger. The following shareholders were present in person or by proxy.

Thereafter the chairman of the meeting stated that a majority of the total number of shares issued and outstanding was represented and that the meeting was complete and ready to transact any business before it. It was then ordered that proxies be appended to the minutes of the meeting.

The president then gave a general report of the business and finances of the corporation. The secretary then reported changes, if any, to the corporation's shareholders list since the last such report.

The chairman then stated that the election of directors of the corporation was now in order and the following were nominated as directors: __________ [specify].

Thereafter the chairman appointed as inspector of election. The inspector subscribed and verified the oath of office.

The oath of the inspector was then appended to the minutes of the meeting. A ballot was then taken, the vote was canvassed and the inspector of election reported the following votes had been cast as follows:

Upon the tally of the vote the chairman declared the following nominees were duly elected as directors of __________ Corporation to serve until the next annual meeting of shareholders or until successors are elected and qualify: __________ [specify names of directors elected].

There being no further business, a motion to adjourn was presented and seconded, accordingly the meeting was adjourned.

The annual meeting of Board of Directors of the corporation was held at __________ [address], on __________ [date].

The meeting was called to order by __________ [name], the __________ [specify office] of the Corporation.

The secretary thereafter reported to the Directors that the meeting had been called pursuant to __________ [specify a notice of meeting and/or waiver of notice thereof] in accordance with the corporation's bylaws. It was ordered that a copy of the __________ [specify notice and/or waiver of notice] be appended to the minutes of the meeting.

Directors present at such meeting, either in person or by conference--speaker telephone--were __________ [names], and constituted a quorum of the authorized number of Directors of the Corporation. There were no Directors absent from such meeting. Thereafter __________ [name], the Chairman of the Board of Directors acted as chairman of the meeting and __________ [name], Secretary of the Corporation, acted as Secretary of the meeting.

The chairman of the meeting stated that the appropriate number of Directors were present to conduct business for the Corporation. The chairman then stated that the meeting was complete and ready to transact any business presented therein at the meeting.

The secretary read the minutes of the last previous meeting of the Board of Directors which was conducted on __________ [date]. Thereafter on motion duly made, seconded and unanimously adopted, it was:

RESOLVED that the minutes of the meeting of the Board of Directors conducted on __________ [date], as read by the secretary be and are hereby approved in all respects and the secretary is directed to insert them in the Corporate Minute Book.

The first order of business was the election of corporate officers. Whereupon motion duly made, seconded and unanimously adopted, it was

RESOLVED that the following persons are elected officers of the corporation to serve for one year or until their successors are elected and qualify:

The President then gave a general report of the business and finances of the corporation. The secretary then reported changes, if any, to the corporation's shareholders' list since the last such report.

The Directors determined that the next Annual Meeting of the Shareholders and Directors which is required by law and by the Corporation's Bylaws to be held should be set. After discussion it was agreed that it should be most convenient for the meeting to be held on __________ [date], at __________ [time] and at __________ [address]. Accordingly, upon Motion duly made, seconded and unanimously adopted, it was:

RESOLVED, that the next annual meeting of the Shareholders of the Corporation be held on __________ [date], at __________ [time] at __________ [address].

RESOLVED, further that in connection with the annual meeting, the Treasurer of the Corporation is hereby directed to compile and deliver to the Secretary of the Corporation for service upon each shareholder of the Corporation at least ten (10) days prior to the scheduled annual meeting, a full complete and clear statement of the business and condition of the Corporation including a balance sheet, income statement and surplus statement, all the same being prepared by generally accepted accounting principles.

Since the date of the last meeting of the Board of Directors, the President announced that numerous acts and transactions have been entered into on behalf of the Corporation by the Officers and Directors of the Corporation. Accordingly, since all of the actions and transactions may not have been reflected in the Corporate Minute Book of the Corporation, the Chairman announced that it was desirable that the Board confirm and ratify the actions of the Officers and Directors by appropriate ratification or resolution. Therefore by unanimous consent of all of the Directors, it was:

RESOLVED, that all of the activities, obligations and transactions as they have been taken or made by the Offices or Directors of the Corporation since the date of the Corporation's inception be and they are hereby ratified and approved as authorized actions of the Corporation.

In addition the President submitted to the Board of Directors, the following business for the Board�s approval:

There being no further business conducted at the meeting upon Motion duly made, seconded and unanimously adopted, the meeting was adjourned at __________ [time] on __________ [date], and witness the official seal of the Corporation.

We, the undersigned ______________ (shareholders, OR directors) hereby agree and consent that the annual meeting of shareholders of __________ Corporation shall be held as follows:

The purpose of the meeting shall be to elect _____________ (directors, or officers) of the corporation and to transact all such business as may lawfully come before the meeting and we hereby waive all notice requirements of the meeting and any adjournment thereof.

Skill Level	Time Estimate	Materials	Equipment-Tools	Library Resources	Pre-requisite Knowledge

Annual Meeting Checklist