It’s nearly 9,000 miles from New York City to Wellington, New Zealand, but that didn’t stop AWEB Managing Editor Richard Koreto from direct dialing the offices of Xero from his Android phone. And as he was connecting, he didn’t even stop to think why or how a global software company was thriving in a country with fewer than 5 million people: Geography is rapidly becoming irrelevant, whether it’s conducting an interview or growing a company. And that’s both the point of Xero’s model and the reason for its success.

Someday, we will tell our children about how software was “downloaded,” or even transferred to laptops, from something called a “CD.” This was before all software, and all the data the programs managed, were stored offsite, in the “cloud.” And in that future, we’ll be able to list companies like Xero, which provides accounting solutions, as one of the entities that paved the way.

Xero, based in Wellington, New Zealand, is not the only company in the cloud, or even the first. What helps set it apart is its origins as a cloud-based software company, rather than as one that retrofitted a traditional model to the cloud later on. Self-described “serial entrepreneur” Rod Drury founded a company in 2006 to meet the needs of small businesses. (He called it “Xero,” he said, because it’s a short memorable name and the domain was available.) AccountingWEB caught up with Drury in his Wellington offices in mid-May to hear more about his company, how the accounting world is changing, and what he sees for the future.

“We love the small business economy,” said Drury, to start. “The small businesses make a big difference,” and yet he found them poorly served by other software companies. There was a niche for a company that could get rid of much of what Drury called the “drudgery” of accounting. Indeed, Drury emphasized that the process was more important than the product—it was all about connections. “We want to exploit the cloud’s ability to connect small businesses to each other and to big businesses.”

The cloud is making all this possible, he said. With companies like Xero, the very nature of financial relationship between different companies changes. It becomes easier to access the cloud-based data to discuss business performance among companies and customers and suppliers. “Suddenly, the small business owner sees a new ability to work with its customers. Not only is the cost of compliance reduced, but we see the accounting department move from mere compliance to advice,” said Drury. “It’s like when Henry Ford automated car manufacturing.” The accountants are now free for new tasks.

Drury gave some specific examples. A small business, with its financials now in the cloud, can create and continually connect with an electronic supply chain. Sales staff, on the road, can easily check numbers from their tables. Processes like invoices and reconciliation are now automatic. Xero’s services can work in coordination with other companies’ applications, so tax filing, management reports and e-commerce all work together. In fact, Drury sees a massive investment in business software in the coming year, and this can only help companies. “Once your accounting is under control, everything comes together,” said Drury.

Overall, the processes will work much more smoothly, continued Drury. Everyone will be able to gain access to data they need much more simply. “Everyone is developing a cloud strategy. We’re seeing an opening of the accounting industry so data can flow.”

A brief look at some of Xero’s recent achievements shows that other companies are getting it too, including some big ones. In March, Xero announced a strategic alliance in the United Kingdom with KPMG, to provide select online accounting and tax services to small and medium-sized enterprises using the cloud. Meanwhile, in the United States, Xero formed a strategic alliance with H&R Block, as part of Block’s Small Business Program suite of services. Block will promote Xero as the sole recommended small business online accounting solution.

Major publications are taking note: Forbes put Xero on the #1 spot of the world’s “Most Innovative Growth Companies,” noting it had a 5-year average sales growth of 210.2 percent.

“We see it as a real endorsement that these big names want to partner with us. It’s a big deal that they’re working with the kinds companies that didn’t even exist until recently. But that’s the way it goes—the big companies working with the entrepreneurial companies.” And will others be following suit? Absolutely. “We see the Big Four actively moving into the cloud space. And they’re doing so because they’re getting pressure from the smaller firms.”

Throughout the interview, Drury emphasized that accounting was just the beginning. “It’s about more than that—it’s about ending the need for desktop software entirely.” Just think if everything you have in Excel and Word is all online—all the information accessible. This could happen in the next two to five years, said Drury. As a result, banks will have all a company’s information at its fingertips, when applying for a line of credit, for example. The accountants will become even more important, working with the banks, as the data transfer process becomes streamlined.

It will be a new world for companies and their customers, suppliers, banks, and insurers. And most of all, “it will be a new world for accountants,” said Drury.

by Richard Koreto on Jun 4 2014

The first five 2014 tax brackets and their rates should look very familiar. The income levels have been bumped up a little for inflation, as they are every year. The 25% rate for single filers, for example, applied to taxable income between $36,251 and $87,850 in 2013. In 2014, the 25% rate for singles applies to income between $36,901 and $89,350.

That’s not going to make a huge difference in your final tax bill. If nothing else material changes in your tax situation this year, and you generally don’t have too little or too much withheld from your pay, you probably don’t have much to worry about.

You may need to estimate your tax liability more carefully. For example, if you pay estimated taxes, or you’re tired of having way too much withheld from your pay all year, it’s time to pay attention.

If you’re in the 39.6% tax bracket, it’s especially important to plan ahead so you don’t have a rude shock in April of next year.

Follow these steps to take better control of your taxes in 2014:

1. Estimate your 2014 taxable income.
This is your income after taking into account before-tax payroll deductions, personal exemptions, the standard deduction or itemized deductions, and a host of other additions to and subtractions from your income. Start by looking at your 2013 return, and make adjustments as necessary to estimate your 2014 taxable income as closely as possible.

2. Find your tax bracket.
Using your taxable income and your filing status, find your marginal tax rate on this chart:

Tax Brackets, 2014 tax year.

Your marginal tax rate is the rate you pay on each additional dollar within this tax bracket. Your marginal rate does not affect the rate you pay on income in the other brackets.

For example, you pay 10% federal income tax on your first $18,150 of taxable income if you are married filing jointly, no matter how much money you make. You pay 15% tax on the amount of taxable income you have between $18,151 and $73,800.

If your income is $406,751 or more and you are a single filer, or it’s $457,601 or more and you file jointly or are qualifying widow(er), welcome to the 39.6% tax bracket. You’ll pay almost 5% more on your highest level of income in 2014 than you would have before this rate went into effect.

4. Use your tax rate to make better money decisions.
For example, say you’re thinking about making a retirement plan contribution. You might be able to afford to put away more in your plan if you figure out how much state and federal income tax you save contributing to a non-Roth plan.

On the other hand, perhaps you’re deciding whether to take money out of a retirement account now, or five years from now when you are retired. (Assume you are over age 59 ½ and won’t pay a penalty.) Furthermore, say you’re in a 35% bracket now, and you expect to be in a 25% bracket after retirement. By withdrawing the money from a retirement account now, you’re paying 10% more than you would if you withdrew it later.

Be aware that tax rates don’t tell the whole story. When your income rises, you can lose tax benefits, such as credits, that phase out at higher income levels.

Watch out for tax items that change your marginal tax rate. If you’re single with a taxable income of $36,000, for example, your marginal tax rate is 15%. If your taxable income goes up by $10,000, however, you’re now in the 25% tax bracket. The tax you pay on your first $36,900 of taxable income doesn’t change, but most of the additional $10,000 is in the higher tax bracket.

Don’t forget to estimate your state taxes, and self-employment taxes if they apply.

Tax situations can be complicated, and taxable and nontaxable income can affect your tax liability in more ways than you might expect. If you use tax software, you can use their planning features to do the calculations for you with your best estimates for 2014. If you take your taxes to an accountant, consider asking the accountant to help you estimate your taxes.

5. Continue to monitor your tax situation all year.
Revisit your tax plan at least once a quarter, and before you make any major financial decision. That’s the best way to make sure you’re never surprised by the results when you file your return.

Many students take a job in the summer after school lets out. If it’s your first job it gives you a chance to learn about the working world. That includes taxes we pay to support the place where we live, our state and our nation. Here are eight things that students who take a summer job should know about taxes:

1. Don’t be surprised when your employer withholds taxes from your paychecks. That’s how you pay your taxes when you’re an employee. If you’re self-employed, you may have to pay estimated taxes directly to the IRS on certain dates during the year. This is how our pay-as-you-go tax system works.

2. As a new employee, you’ll need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Your employer will use it to figure how much federal income tax to withhold from your pay. The IRS Withholding Calculatortool on IRS.gov can help you fill out the form.

3. Keep in mind that all tip income is taxable. If you get tips, you must keep a daily log so you can report them. You must report $20 or more in cash tips in any one month to your employer. And you must report all of your yearly tips on your tax return.

4. Money you earn doing work for others is taxable. Some work you do may count as self-employment. This can include jobs like baby-sitting and lawn mowing. Keep good records of expenses related to your work. You may be able to deduct (subtract) those costs from your income on your tax return. A deduction may help lower your taxes.

5. If you’re in ROTC, your active duty pay, such as pay you get for summer camp, is taxable. A subsistence allowance you get while in advanced training isn’t taxable.

6. You may not earn enough from your summer job to owe income tax. But your employer usually must withhold Social Security and Medicare taxes from your pay. If you’re self-employed, you may have to pay them yourself. They count toward your coverage under the Social Security system.

7. If you’re a newspaper carrier or distributor, special rules apply. If you meet certain conditions, you’re considered self-employed. If you don’t meet those conditions and are under age 18, you are usually exempt from Social Security and Medicare taxes.

8. You may not earn enough money from your summer job to be required to file a tax return. Even if that’s true, you may still want to file. For example, if your employer withheld income tax from your pay, you’ll have to file a return to get your taxes refunded. You can prepare and e-file your tax return for free usingIRS Free File. It’s available exclusively on IRS.gov.

The Eleventh Circuit Court of Appeals upheld a deficiency notice of more than $5 million against a taxpayer who reported adjusted gross income of $22,921 and taxable income of $13,221 on his late-filed 2006 return (Hoang, No. 13-14398 (11th Cir. 5/2/14), aff’g T.C. Memo. 2013-127).

Diep Hoang’s 2006 tax return was due Oct. 15, 2007, but he did not file it until Sept. 2, 2009, and the IRS was suspicious of the low income reported on the return because it had received Forms 1099 from various brokerage firms indicating he received $14,855,797 from securities sales in 2006. In response, the IRS issued a notice of deficiency for 2006 for $5,188,587 in income tax, an addition to tax of $1,297,534 for failure to timely file, and an understatement penalty of $1,037,717. The IRS treated the total amount reported on the 1099s from the sale of the securities as capital gain because it did not have any information about the basis of the stock that was sold.

In response to the IRS’s notice of deficiency, Hoang filed a petition with the Tax Court claiming that the notice was “totally invalid and illegal” because the IRS was not authorized under the Code to issue the notice, the tax increase was fabricated, the IRS did not meet its burden of proving the legality of the notice, and the IRS was issuing the notice to retaliate for Hoang’s earlier claim that it had committed perjury in a prior controversy with Hoang. Hoang also tried to file a counterclaim arguing that the notice was a criminal act disguised as tax collection and asking for $75 million in damages from the IRS.

While preparing for the Tax Court trial, the IRS tried many times to get cost basis information from Hoang but was unsuccessful. With its first request, the IRS provided a listing of each sale and its amount and date; Hoang responded by saying the request was unconstitutional. In response to the second request, Hoang responded that the IRS lacked jurisdiction because the notice was issued on Aug. 3, 2010, which, he claimed, was after the statute of limitation had run on his 2006 return. Hoang also claimed there were no more documents to provide because “all of them were discarded after April 15, 2010.” 

During the trial, the IRS again tried to get the cost basis information. In one response, Hoang claimed he provided it when he filed his return, but the IRS threw it away. He also tried to submit a 13-page exhibit that was a compendium of various papers, including a document purportedly from his broker that did not identify the account holder. The Tax Court refused to admit the exhibit into evidence because the documents in it appeared to be incomplete and altered, they had not been authenticated, and they had not been provided before trial.

In 2013, the Tax Court issued a 48-page memorandum detailing all of these facts and upheld the IRS’s notice of deficiency in full. The Eleventh Circuit affirmed the Tax Court’s decision, finding that the statute of limitation had not run on Hoang’s return because he did not file it until 2009, and that the deficiency was correct because Hoang failed to provide any cost basis information despite numerous opportunities to do so. All IRS determinations have a presumption of correctness that taxpayers can rebut, but, in this case, the taxpayer presented no evidence that would rebut that presumption.

Starting in tax year 2013, people with home-based businesses can choose a new simplified option for figuring the deduction for business use of a home, commonly referred to as the home office deduction. The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

Normally, home-based businesses are required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Instead, taxpayers claiming the optional deduction need only complete a short worksheet in the tax instructions and enter the result on their return.

Self-employed individuals claim the home office deduction on Schedule C Line 30, farmers claim it on Schedule F Line 32 and eligible employees claim it on Schedule A Line 21.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees, are still fully deductible. Long-standing restrictions on the home office deduction, such as the requirement that a home office be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.

Further details on the home office deduction and the new option can be found in IRS Publication 587.

Most people stop thinking about taxes after they file their tax return. But there’s no better time to start tax planning than right now. And it’s never too early to set up a smart recordkeeping system. Here are six IRS tips to help you start to plan for this year’s taxes:

1. Take action when life changes occur.  Some life events, like a change in marital status, the birth of a child or buying a home, can change the amount of taxes you owe. When such events occur during the year, you may need to change the amount of tax taken out of your pay. To do that, you must file a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer. Use the IRS Withholding Calculator on IRS.gov to help you fill out the form. If you receive advance payments of the premium tax credit it is important that you reportchanges in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace.

2. Keep records safe.  Put your 2013 tax return and supporting recordsin a safe place. That way if you ever need to refer to your return, you’ll know where to find it. For example, you may need a copy of your return if you apply for a home loan or financial aid. You can also use it as a guide when you do next year’s tax return.

3. Stay organized.  Make sure your family puts tax records in the same place during the year. This will avoid a search for misplaced records come tax time next year.

4. Shop for a tax preparer.  If you want to hire a tax preparer to help you with tax planning, start your search now. Choose a tax preparer wisely. You are responsible for the accuracy of your tax return no matter who prepares it. Find tips for choosing a preparer at IRS.gov.

5. Think about itemizing.  If you usually claim a standard deduction on your tax return, you may be able to lower your taxes if you itemize deductions instead. A donation to charity could mean some tax savings. See the instructions for Schedule A, Itemized Deductions, for a list of deductions.

6. Keep up with changes.  Subscribe to IRS Tax Tips to get emails about tax law changes, how to save money and much more. You can also get Tips on IRS.gov or IRS2Go, the IRS’s mobile app. The IRS issues tips each weekday in the tax filing season and three days a week in summer.

Remember, a little planning now can pay off big at tax time next year.

April 15 was the tax day deadline for most people. If you’re due a refund there’s no penalty if you file a late tax return. But if you owe taxes and you fail to file and pay on time, you’ll usually owe interest and penalties on the taxes you pay late. Here are eight facts that you should know about these penalties.

1. If you file late and owe federal taxes, two penalties may apply. The first is a failure-to-file penalty for late filing. The second is a failure-to-pay penalty for paying late.

2. The failure-to-file penalty is usually much more than the failure-to-pay penalty. In most cases, it’s 10 times more, so if you can’t pay what you owe by the due date, you should still file your tax return on time and pay as much as you can. You should try other options to pay, such as getting a loan or paying by credit card. The IRS will work with you to help you resolve your tax debt. Most people can set up a payment plan with the IRS using the Online Payment Agreement tool on IRS.gov.

3. The failure-to-file penalty is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. It will not exceed 25 percent of your unpaid taxes.

4. If you file your return more than 60 days after the due date or extended due date, the minimum penalty for late filing is the smaller of $135 or 100 percent of the unpaid tax.

5. The failure-to-pay penalty is generally 0.5 percent per month of your unpaid taxes. It applies for each month or part of a month your taxes remain unpaid and starts accruing the day after taxes are due. It can build up to as much as 25 percent of your unpaid taxes.

6. If the 5 percent failure-to-file penalty and the 0.5 percent failure-to-pay penalty both apply in any month, the maximum penalty amount charged for that month is 5 percent.

7. If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April 15 due date.

8. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show reasonable cause for not filing or paying on time.

The April 15 tax deadline is approaching. What happens if you can’t get your taxes done by the due date? If you need more time, you can get an automatic six-month extension from the IRS. You don’t have to explain why you’re asking for more time. Here are five important things to know about filing an extension:

1. File on time even if you can’t pay.  If you complete your tax return but can’t pay the taxes you owe, do not request an extension. Instead, file your return on time and pay as much as you can. That way you will avoid the late filing penalty, which is higher than the penalty for not paying all of the taxes you owe on time. Plus, you do have payment options. Apply for a payment plan using the Online Payment Agreement tool on IRS.gov. You can also file Form 9465, Installment Agreement Request, with your tax return. If you are unable to make payments because of a financial hardship, the IRS will work with you.

2. Extra time to file is not extra time to pay.  An extension to file will give you six more months to file your taxes, until Oct. 15. It does not give you extra time to pay your taxes. You still must estimate and pay what you owe by April 15. You will be charged interest on any amount not paid by the deadline. You may also owe a penalty for not paying on time.

3. Use Form 4868.  You can also request an extension by mailing a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. You must submit this form to the IRS by April 15. Form 4868 is available on IRS.gov.

You don’t need to submit a paper Form 4868 if you make a payment using an IRS electronic payment option. The IRS will automatically process your extension when you pay electronically. You can pay online or by phone.

4. Electronic funds withdrawal.  If you e-file an extension request, you can also pay any balance due by authorizing an electronic funds withdrawal from your checking or savings account. To do this you will need your bank routing and account numbers.

Visit IRS.gov for more information about filing an extension and the many options you have to pay your taxes.

If you find you owe more than you can pay with your tax return, don’t panic. Make sure to file on time. That way you won’t have a penalty for filing late.

Here is what to do if you can’t pay all your taxes by the due date.

1. File on time and pay as much as you can.  File on time to avoid a late filing penalty. Pay as much as you can to reduce interest charges and a late payment penalty. You can pay online, by phone, or by check or money order. Visit IRS.gov for electronic payment options.

2. Get a loan or use a credit card to pay your tax. The interest and fees charged by a bank or credit card company may be less than IRS interest and penalties. For credit card options, see IRS.gov.

3. Use the Online Payment Agreement tool.  You don’t need to wait for IRS to send you a bill before you ask for a payment plan. The best way is to use the Online Payment Agreement tool on IRS.gov. You can also file Form 9465, Installment Agreement Request, with your tax return. You can even set up a direct debit agreement. With this type of payment plan, you won’t have to write a check and mail it on time each month. It also means you won’t miss payments that could lead to more penalties.

4. Don’t ignore a tax bill.  If you get a bill, don’t ignore it.  The IRS may take collection action if you ignore the bill. Contact the IRS right away to talk about your options. If you are suffering a financial hardship, the IRS will work with you.

In short, remember to file on time. Pay as much as you can by the tax deadline and pay the rest as soon as you can. Find out more about the IRS collection process on IRS.gov. Also check out IRSVideos.gov/OweTaxes.