Knowing ahead of time which issues can trigger an audit — and what IRS tax examiners look for – can protect your company and help you audit-proof your tax returns.

When performing an audit, IRS examiners come well armed. Over the past decade, the IRS has developed a library of Audit Techniques Guides to bring  examiners up to speed on specific issues in various industries, including construction. The guides are used to train tax examiners.

So if your construction company is hit with an audit, you can expect that the IRS will be well informed and on the lookout for questionable tax stances that are common in the industry.

Here are four of the top targets described in the IRS Construction Industry guide that you should be aware of:

1. Cash versus accrual accounting has been a hot button for the IRS in recent years. Uncle Sam doesn’t like cash-basis accounting both because it delays tax payments and because the timing of income and expenses can be manipulated. Many companies, on the other hand, like cash basis accounting because income isn’t taxed until it’s received. With the more complex accrual method, a company accounts for transactions when they occur, which is not necessarily when the cash is received.

Construction firms are often frustrated by the IRS stand on these two accounting methods, particularly if the companies incur costs to buy materials but don’t technically hold inventory. There have been cases when companies have ordered materials and had them delivered to job sites, and the IRS forced them to change to accrual accounting because the materials were “inventory.” Auditors are likely to conclude that materials are income-producing inventory when the cost totals 15 percent of gross receipts or more.

Good news: In a major policy shift, the IRS announced awhile back that it would allow many service businesses that maintain inventory and have annual average gross receipts of $10 million or less to use cash-method accounting.

2. Long-term contracts. Examiners take a close look at the completion dates of jobs, with an eye toward determining whether a company is properly using the completed contract or percentage of completion methods.

Under completed contract accounting, the focus is just what it sounds like — completion. Auditors are taught to look for signs that the end of a job was deliberately delayed, particularly when 95 percent of a job is completed one year, with the remainder held over to a second year.

Tax examiners also look for changes in a company’s contracts to determine if they involve separate projects that should be treated as separate contracts.

For tax purposes, that can make the original order end sooner than you planned. And if a job calls for building identical units, auditors could determine that each unit should be treated as a separate project under a separate contract. That bars you from deferring income until all the units are finished.

3. Independent contractors. In an audit, you can pretty much count on IRS examiners checking your business for independent contractors. And if they decide an employee is improperly classified as a contractor, you can be liable for substantial back payroll taxes, penalties and other costs. The IRS also warns auditors that “smaller contractors …may report income for only a portion of their work . . . Some contractors have been willing to work for 20 to 25 percent less on the condition that no Form 1099 is issued.”

4. Nooks and crannies. Tax auditors look for indications of unreported work and income shifting between related parties. Save all payroll records, correspondence, freight bills, travel expenses and shipping tickets to substantiate your deductions. Auditors also search for — among other things — evidence of work done at less than fair market prices for relatives and friends and personal use of company-owned cars.

Prevention

Before your company is hit with an IRS audit, talk with your adviser to make sure all involved parties have a clear understanding of the practices your company employs. Pay particular attention to cash flow and expansion plans. If you determine your tax reporting method is high risk, you may want to change it voluntarily before you hear from the IRS. This could avoid a retroactive change that covers several years and permit you to spread any tax effects over four years. If an auditor forces a change, taxes and interest are due immediately.

Hoffman Stewart & Schmidt, P.C. provides the information in this newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

According to one of the passengers, the driver of the vehicle stated the brakes were not operating correctly when he tried to stop. To avoid hitting several cars in front of him, he swerved, losing control and striking a concrete barrier. This caused the vehicle to flip over, land on its top and skid across the pavement. Tragically, the driver and two other passengers were killed.

To help avoid such a tragedy, it is essential to have a vehicle inspection and maintenance program in place. It is necessary to assign responsibility for the maintenance and upkeep of church vehicles, as well as private vehicles, to a church employee or volunteer to help ensure it gets done. Also, establish a schedule for regular preventive maintenance to be performed by a mechanic. All maintenance records should be documented and kept on file for each vehicle. This will not only provide a cost record for each vehicle, but also permit the quick evaluation of prior maintenance on any vehicle and minimize exposure during litigation following an accident.

Items that should be inspected and maintained on a regular basis include the following:

• Brake system
• Steering and suspension systems
• Oil and lubrication systems
• Electrical systems
• Coolant systems
• Exhaust systems
• Tires and wheels
• Safety and emergency equipment

A program of part replacement should be implemented in which critical parts are replaced before in-service failure occurs.  Examples of such parts include these:

• Brake shoes and pads
• Springs, shocks and struts
• Belts and hoses
• Tires – If there is less than 1/8 inch of tread left, the tires should be replaced.
  Learn other factors important to tire safety.
• Windshield wiper blades.

Vehicle Maintenance and Inspection Records

Having a record of all maintenance and inspections performed on each vehicle is important in the event there were ever a claim involving that vehicle. This vehicle history file should record inspections and other important maintenance information, such as overhauls, rebuilds, and major repair work. Date of purchase, date and mileage of all preventive maintenance and repairs also should be noted.

The Importance of Maintenance

Many transportation accidents are caused by unsafe vehicles and poorly maintained equipment, such as old, worn, or improperly inflated tires; faulty brake systems; or windshield wipers that do not work. But, with frequent inspections and regular maintenance, a wide variety of equipment problems can be identified and corrected before they become dangerous.

But many families remain poorly prepared for such lawsuits in spite of their concern. They fail to appreciate the different aspects of their lifestyle that can lead to a lawsuit. They underestimate the cost of the potential damages, and they misunderstand the affordability of effective protection. As a result, families often lack the proper types and amounts of liability insurance.

These are among the findings of a new study by ACE Private Risk Services, the high net worth personal insurance business of the ACE Group. The study, “Targeting the Rich: Liability Lawsuits and the Threat to Families with Emerging and Established Wealth,” included a survey of individuals from households with more than $5 million of investable assets about their perceptions and behavior regarding the threat of personal liability lawsuits.

“Families feel increasingly targeted, especially given the national discourse over disparities in wealth, income and taxation,” said Bob Courtemanche, division president of ACE Private Risk Services.

In the study, more than two-thirds said they think public perceptions of the wealthy have grown more negative since 2008. Almost 40 percent believe they are more likely to be sued in the aftermath of the economic crisis, compared to 7 percent who said they are less likely to be sued. More than 80 percent agreed their wealth alone makes them an attractive target for liability lawsuits.

“Nevertheless, many underestimate the risk,” added Jim Hageman, ACE senior vice president of claims for global personal and small commercial insurance. “Half of the people we surveyed thought the worst-case lawsuit would be less than $5 million. But our experience is that awards for lawsuits involving serious injury can equal many times that.”

Because families tend to underestimate their potential liability from a car accident or other incident, they often lack sufficient liability insurance, according to the ACE executives.

More than 20 percent of survey respondents reported having no umbrella liability insurance. Umbrella liability is important because the liability coverage in automobile and homeowner policies rarely exceeds $500,000, according to the insurer. Insurance companies that specialize in insuring high net worth families usually offer coverage from $1 million up to $100 million, and the cost can be offset by increasing the deductibles in the homeowner and auto policies.

“Choosing a higher deductible and accepting more responsibility for minor losses so that you can insure against a multi-million-dollar lawsuit is a wise strategy,” Hageman said.

More than 60 percent of respondents serve or have served as a volunteer board member or trustee of a charitable organization, but some 35 percent do not have their own directors and officers insurance.

Americans also underestimate the risks posed by dog bites and libel, slander, or character defamation resulting from participation in social media platforms, the survey said.

Under provisions called the employer shared responsibility rules, the PPACA requires large employers (generally those with 50 or more full-time employees) to provide affordable group health coverage with sufficient value to full-time employees and their dependents. Full-time employees are generally defined as those who work on average at least 30 hours per week. Employers that fail to comply with these rules can face penalties.

What are the potential penalties?

The failure to offer coverage penalty applies if at least one full-time employee obtains subsidized coverage on an exchange where the employer does not offer coverage to at least 95% of its full-time employees and their dependents. This penalty – which can be up to $2,000 per year for each full-time employee (in excess of 30) – will be based on the total number of full-time employees an employer has, regardless of how many employees have government-subsidized exchange coverage.

The insufficient coverage penalty applies if the employer offers full-time employees coverage, but the coverage is either unaffordable (individual premium cost exceeds 9.5% of the employee’s household income) or does not provide minimum value (plan pays less than 60%of the covered costs). Proposed regulations released by the IRS provide guidance and alternative safe harbors for calculating whether health coverage is unaffordable, including use of an employee’s W-2 earnings. The potential penalty for insufficient coverage is $3,000 per year for each employee who obtains government-subsidized coverage on an exchange.

Employers also should note that in determining whether an employer is subject to these provisions (i.e., is a “large employer”), the IRS controlled group rules are applied – meaning that all affiliated employers for which there is 80% or greater common ownership will be treated as a single employer. However, compliance with the employer shared responsibility rules – and any associated penalties – will generally be assessed on an employer-by-employer basis.

Who is considered a full-time employee?

As an employer, the determination of who is a full-time employee will be crucial in evaluating your options for complying with the employer shared responsibility rules, and equally important, designing your group health plan’s eligibility and participation requirements.

Because there can be various ways of assessing what constitutes a full-time employee eligible for coverage under the PPACA, the IRS has issued guidance in the form of several notices, as well as temporary regulations. These guidelines set out criteria and standards that can help employers make accurate determinations when hiring new employees, including:

• § Initial measurement period – A designated period of not less than three months or more than 12 months used in determining whether a newly hired variable or seasonal employee is full-time.
• § Standard measurement period – An annual designated period of not less than three months or more than 12 months used to determine whether an ongoing variable or seasonal employee is full-time.
• § Administrative period – A period of up to 90 days for making full-time determinations and offering/implementing full-time employee coverage.
• § Stability period – An annual designated period of not less than six months (and not less than the corresponding measurement period) during which the employer must offer affordable minimum essential health coverage to all full-time employees, or face financial penalties for not doing so.
• § Full-time employees – If a new employee is reasonably expected to average at least 30 hours per week at the time of hire, the employee must automatically be treated as full-time and offered group health coverage within three months of hire.
• § Variable hour and seasonal employees – A variable hour employee is someone whom the employer cannot reasonably determine will average at least 30 hours per week at the time of hire. No definition is provided for a seasonal employee, but presumably it would include anyone who works on a seasonal basis. Employers may use the initial measurement period to determine whether a newly hired variable or seasonal employee actually averages at least 30 hours per week, and the standard measurement period to determine whether an ongoing variable or seasonable employee actually averages at least 30 hours per week. If the employee does average at least 30 hours per week during the initial measurement period or standard measurement period, the employer must offer affordable minimum essential health coverage during the stability period, or face financial penalties for not doing so.
• § Transition from new to ongoing employee status – Once a new employee has completed an initial measurement period and has been employed for a full standard measurement period, the employee must be tested for full-time status under the ongoing employee rules for that standard measurement period, regardless of whether the employee was full-time during the initial measurement period.

Most of our carriers have some excellent resources.  Have you checked out PacificSourse’s HealthcareLawGuide.com lately?  They recently added several pages of useful healthcare reform information for Oregon employers. The guide, called Healthcare Reform: What Oregon Employers Need to Know, is geared to help employers make sense of the exchanges, subsidies, tax credits, essential health benefits, and much more.

Learn More about Reform

Henry J Kaiser Family Foundation Implementation Timeline.

Henry J Kaiser Family Foundation. Penalties for Employers Not offering Affordable Coverage.

HealthCare.gov

IRS. What you need to know about the Small Business Health Care Tax Credit.

Kaiser Permanente understanding the Affordable Care Act.

Cigna Health care reform website: InformedOnReform.com

Regence BlueCross BlueShield of OR ACA website” HealthCareAndReform.com

UnitedHealthcare: Customer Reform Guide Updated for 2013, 2014.

Fliers Summarize ACA Changes

Cover Oregon  This is the State of Oregon web site also known as the exchange.   Oregon individuals and employers will be able to shop for health insurance plans and access financial assistance to help pay for coverage.

Read about the Exchange Navigators Proposed Regulation

Read About the SHOP (Small Business Health Options Program) Proposed Regulation

Prohibition of pre-existing conditions exclusions. This prohibits group health plans and health insurers from imposing exclusions for pre-existing conditions.

Prohibition of excessive waiting periods. This prohibits group health plans and health insurers from applying a waiting period that exceeds 90 days.

Prohibition on use of health status. Prohibits group health plans and health insurance issuers from establishing rules for eligibility (including continued eligibility) for an individual or dependent based on health status, medical conditions, claims experience, disability – any health-status-related factor as determined by the Secretary of HHS.

Guaranteed availability (guaranteed issue) and guaranteed renewability.  Health insurers must accept any individual or employer group that applies for coverage during open or special enrollment periods. Further, they must renew coverage at the option of the individual or group.

Single risk pool. Health insurers in the individual and small group markets must treat the entire market in a state as a single risk pool when setting rates. Under proposed rules, an insurer may vary premiums for a particular plan based only on certain plan-specific factors.

Allowable rating factors. Insurers may vary premiums for individuals based only on specified allowable rating factors, including age, tobacco use, family composition, and geographic rating area.

Pooling and Risk-Sharing

Several of the reforms scheduled for 2014 concern pooling and risk-sharing. Among these are the following:

• Transitional reinsurance program. HHS and the states will establish a $25 billion transitional (2014 through 2016) reinsurance program for the individual market, to be funded by health insurers and group health plans.
• Risk corridors. This provision establishes a risk corridor program for “qualified benefit plans” in the individual or small group market (2014 through 2016) based on the plan’s ratio of allowable costs to a target amount (modeled on the risk corridors under Medicare Part D for regional PPOs).
• Risk-adjustment program. HHS or the states will establish a risk-adjustment process for the individual and small group markets within that state that assesses a charge on issuers whose actuarial risk for a year is less than the average, and pays issuers whose actuarial risk for a year is greater than the average.

Wellness programs. This provision codifies and enhances provisions of the HIPAA nondiscrimination regulations that allow rewards to be provided to employees for participation in or for meeting certain health status targets related to a wellness program. If certain conditions are met, it also allows health plans to provide a discount or rebate when an individual satisfies a standard related to a health factor.

Quality reporting. HHS must develop annual reporting requirements with respect to plan benefits and health care provider reimbursement structures to improve quality. These reports will be published on a public website.

The “comparative effectiveness” fee

Under the ACA, the comparative effectiveness fee funds clinical effectiveness research projects at the Patient-Centered Outcomes Research Institute (PCORI). The fee is assessed against individual and group health insurance policies and self-funded employer group coverage.

The comparative effectiveness fee is imposed for policy and plan years ending after September 30, 2012, and is assessed for each covered life. The fee sunsets for policy and plan years ending after September 1, 2019. The fee will be treated as a tax for federal income tax purposes.

The following types of coverage are exempted from the fee:

• Coverage for exempted benefits (HIPAA “excepted benefits”)
• Medicare, Medicaid and state Children’s Health Insurance programs
• Programs for medical care (other than through insurance policies) to members of armed forces and their families ( i.e., TRICARE)
• Programs under the Indian Health Care Improvement Act

The amount of the fee is as follows:

• For policy or plan years ending during federal fiscal year 2013 (October 1, 2012, through September 30, 2013): $1 for each covered life.
• For policy or plan years ending during federal fiscal year 2014 (October 1, 2013, through September 30, 2014): $2 for each covered life.
• For policy or plan years ending in federal fiscal years after September 30, 2014, the fee is equal to the dollar amount for the preceding fiscal year, multiplied by the percentage increase in the projected per capita amount of National Health Expenditures as most recently published before the beginning of the fiscal year.

Cover Oregon gave approval the week or April 1^st  to 22 carriers that plan to offer individual, small employer, and dental plans. The plans themselves have not yet been reviewed or approved, and there are still many steps the carriers must follow to make their plans available this fall, but Cover Oregon expects it will provide a robust level of coverage choices to Oregonians.

Click here to read the full press release…

Cover Oregon and the Oregon Health Authority have partnered to offer Oregon organizations navigator funding and outreach opportunities.

Oregon’s grant opportunity for navigators is available now. The first Request for Grant Proposals (RFGP) was posted on ORPIN on April 11, and will remain open until May 9. OHA anticipates final agreements will be signed in July 2013. Grantee organizations will be chosen through a formal RFGP process; OHA will evaluate proposals and award funds based on a proposed work plan and budget. The solicitation documents can be accessed at orpin.oregon.gov by searching the open opportunities for OHA-3516-13. All questions specific to the RFGP should be directed to the contact listed in the solicitation. Interested parties who have not yet registered with ORPIN will need to do so on the ORPIN website prior to accessing the solicitation.

Successful grantees will work within their local communities to provide education and outreach to individuals and families about Cover Oregon and their coverage options. Grantees will also help people with the application and enrollment process to get the health coverage that is right for them, including Qualified Health Plans and public health programs like Medicaid and Healthy Kids.

For more information, e-mail communitypartner@coveroregon.com

The proposed rules (CMS-9955-P) set standards for navigator training, certification, and conflict of interest. They apply to navigators dealing with health insurance provided within a federal exchange, to federal-state partnership exchanges, and to non-navigator assistance personnel working through state-based exchanges that received federal funding.

Conflict of Interest Rules: CMS-9955-P sets out a number of rules aimed at preventing conflicts of interest. Among them are:

• Any state requirements for licensing or certifying navigators or non-navigator assistance personnel may not conflict with the rules set out in the health reform law
• No person or entity connected with a stop-loss insurance issuer may serve as a navigator
• Navigators will have to submit, in writing, assurances that they (and their staff) are not connected in any way with (including receiving payment from or being affiliated with) any health insurance issuer (including issuers or stop-loss insurance), and that they are not an association that includes members, or lobbies on behalf of any health insurance issuer in connection with enrolling individuals or employees in an exchange-offered health plan
• Navigators (companies and individuals) must disclose any employment arrangements—existing and those within the preceding five years—with health insurance issuers. The disclosure must also cover navigators’ (and their employees’) spouses and domestic partners

Training: The proposed rule does not require that navigators and non-navigator assistance personnel be licensed, but does impose training and certification requirements. The requirements include completion of (and passing) a training course approved by the Department of Health and Human Services (HHS) and annual recertification. The rule requires navigators and non-navigator assistance personnel to demonstrate competency in both small business (including SHOP [Small Business Health Options]) and individual coverage.

Approved training must include qualified health insurance coverage levels (and how they operate), including benefits covered, payment processes, and appeals. It must also educate navigators on insurance for the poor, including Medicaid and the Children’s Health Insurance Program (CHIP). Also to be included in the training is information on the tax implications of the coverage a prospective enrollee selects, eligibility for federal subsidies, and contact information for federal and state agencies that can provide consumers with additional assistance on coverage options.

Access/Information Reporting: The proposed rule also requires that navigators and non-navigator assistance personnel collect and maintain demographic information on the populations served by the exchange for which they work. This information is designed to help assure that low-income and diverse (racially and culturally) populations have access to the assistance provided by navigators, the proposed rule states. Accordingly, navigators must also be able to provide or obtain, “appropriate translation services” where needed. The rule also requires that navigators make consumer education materials accessible to people with disabilities.

Next Steps: CMS will accept comments on this proposed rule, which was published in the Federal Register on April 5, through May 6. The proposed rule emphasizes that a navigator is inherently different from a professional agent/broker. For example, the rules state a navigator must be proficient in public coverage options (particularly with respect to the poor) and thus requires different expertise than that required of a licensed agent/broker. Navigators will also be responsible for data collection that is not normally part of an agent’s/broker’s activity.