CPAs to the Rescue

Certified public accountants have never been just bean counters. Their day-to-day work for companies has long involved a varied mix of financial compliance and tax matters, auditing, consulting, strategic planning, internal review and risk management, as well as services often provided to company owners and executives.

And that's just the usual stuff. Sometimes crises turn up for company clients that could generate very substantial costs if not appropriately addressed, and might even threaten the company's ability to survive. These are times when a CPA's specialized expertise really comes into play.

Research Payoff

"I spend a great deal of my time doing research, keeping up with IRS and New Jersey tax laws in order to be able to deal with potential [client] disasters," says Timothy H. Brennan, tax manager, with Bederson in West Orange. "There are no generic answers about taxes." So many things here "depend on what year you're talking about, what business you're in."

Research in these realms is more necessary than ever these days because governments at all levels are so pressed for revenue, more aggressive and less forgiving.

Brennan describes one such situation involving New Jersey taxes. While an IRS audit usually focuses on a specific issue, he notes, the state sends out blanket audits covering a number of years, and covering sales and use taxes as well as income and payroll taxes.

And if these state audits find that owed sales and use taxes were not paid and the forms not even filed, assessments can soar.

This happened to one of Brennan's clients, a parking facility. It had filed all its other state tax returns but not one for sales taxes. The client got hit with a huge tax bill; seven years' worth plus penalties and interest – thousands and thousands of dollars the business didn't have.

"But because I had done the research," says Brennan, "I found something the auditor didn't catch. My client operates in one of those municipalities that has a tax on receipts, including a municipal parking tax, which my client had paid. The auditor didn't know this municipal tax was applicable. Because of my research … I found a 2006 law that said receipts from parking were not subject to state tax if a municipality collected such a tax."

Foreign-Owned Company Tax Fixes

With so many foreign-owned companies now doing business on these shores, it's natural that sooner or later a few would encounter problems with the IRS. Kimberlee S. Phelan, tax partner with WithumSmith+Brown in Princeton (the firm recently merged with EisnerLubin LLP), notes two such encounters that generated confusion as well as concern.

One involved a Japanese-owned client that's always very careful in its tax filings. It was therefore alarmed when it started getting notices saying a company tax return did not match W-2 information received by the IRS, and a huge civil penalty was being assessed.

"They came to me," says Phelan, "because I have a lot of experience working with foreign-owned company clients. We hadn't prepared the original company returns … but this client gave us power of attorney and we began looking for the problem."

For a while, "no one could figure what the problem was. I had to reconstruct all returns going back five years, work with the IRS and work with the company doing the W-2s. A senior officer even came to the U.S. [from Japan] to work with me."

It took more than 18 months to get things straightened out. "It turned out that one of the company's American employees was changing his own W-2 and signing it as an officer of the company. I heard just a few months ago a criminal investigation was being started."

Another crisis situation for a foreign client came because of a cultural quirk. IRS Form 5472 must be filed by September 10 by any U.S.-based corporation that's 25 percent or more foreign owned. There's a $10,000 fine for not meeting this deadline.

One of Phelan's German clients couldn't figure out why they were being hit with this penalty. "We knew everything had been sent to the IRS by certified mail … that everything had been done to file before the deadline," she says.

The explanation turned out to be simple – and quirky. "We discovered," says Phelan, "that in Europe and the U.S. they abbreviate dates differently, inverting them." So instead of September 10 written on the filing as 9/10, the client inverted the date and month as 10/9 "and that caused the mix up."

Going To The Mat With New Jersey

States usually go along with the IRS on what's deductible. But not always. And sometimes the differences can involve a lot of money.

That was the case with the Extra-Territorial Income Inclusion Act, a law aimed at giving U.S. companies a more level playing field with competitors. It was repealed in 2004, but prior to that, a lot of New Jersey companies took this deduction on their state returns. New Jersey, however, decided to deny that deduction.

"One of our big clients had taken this deduction for several years," notes Robert Hopper, principal and head of the Manufacturing Industry Service Group at Clifton-based Sax Macy Fromm & Co. "When New Jersey decided not to allow it, we looked through all their rules, but didn't find a good reason they could do that. We felt the state's position was totally wrong, so we appealed on behalf of our client.

When that appeal was rejected, though we didn't want to have to do so, we took it to court."

There was a lot of money at stake for the company, $1.5 million linked to the deductions, stacked up against hundreds of thousands of dollars in legal and other costs," Hopper adds. "But the client had a lot of faith in us. We helped find them an outside counsel. We worked closely with the law firm, helping them prepare the brief. The case was finally decided in 2011. And we won."

A Cooperative IRS

"We had a client that had been very profitable for years, but one year was having a terrible time," recalls Albert J. Passanante, partner with Nisivoccia in Mt. Arlington. "It looked like it might have to go bankrupt."</p>

Today, you can only carry losses in the present tax." year back two years. When this company was in such trouble, however, it was three years. By carrying its huge present year loss back that far, says Passanante, its tax." refund would be large enough to save the company.

Timing was everything here. "By the end of December things had gotten so bad, and with other sources of money no longer available, the company needed that tax." refund very, very quickly to survive," Passanante says. But with the usual time it takes to prepare taxes, file them and the IRS gets around to sending a refund (maybe six months), "there was a 99 percent chance the company would have gone under."

So even though it was unusual, because Passanante and his team were certain about the numbers, they started doing the tax." return at the very end of December. "We were very busy the week after Christmas and got the return prepared by January 2," he continues. "I then hand delivered it to the IRS … had conversations with people there explaining the situation … told them they would have to pay the money anyway, and that by saving the company this way they would get more taxes in the future from the company and its employees.

"Five days after I hand delivered the return to the IRS, the company got its check. It was saved. It's now profitable again, still employing hundreds of people."

A Good Time To Pass It On

The present very tough economy is an ongoing crisis for many companies, especially smaller ones. Anything a CPA can suggest that finds something good in this environment is thus most welcome.

"All of my own clients are closely held companies," says Gerard Bobal, a partner at WeiserMazars in Edison. These clients often wish to pass along the stock or interest in their companies to their next generation "and this is a great time to do it."

The reasons come down to a combination of a bad business environment and recent tax." law changes. Because closely held companies don't trade on an exchange, they have to be valued in another way – ie., based on their present assets (such as real estate) and their operations, both of which tend to reflect presently poor conditions.

That's the economic factor. The tax." changes here involve the unified estate and gift tax." exemption that came into effect in 2011, and will be in place until at least 2013. It has a $5-million combined exemption for gifts to the next generation, plus the end value of an estate.

Thus, lower valuations of these assets based on present market conditions mean more of these assets can be passed along now without exceeding that $5-million threshold in the future. And when the value of these assets hopefully increases at a later date, this passalong strategy might prove itself very worthwhile.

Conclusion

With so many governments at all levels seeking additional revenues from businesses, and a tough economy squeezing profits for so many companies, getting a little help from professionals is greatly appreciated. And as the above examples suggest, CPAs are often the professionals of choice in providing such help.