Hospital Revenue Cycle Management

Posted on October 10, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

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Augmentation thru Technology Adoption

[By Karen White PhD, and Staff ]

Several major hospitals, or healthcare systems, have filed bankruptcy this fiscal quarter. These include a two-hospital system in Honolulu; one in Pontiac, MI; Trinity Hospital in Erin, Tennessee; Century City Doctors Hospital in Beverly Hills, and four hospital system Hospital Partners of America, in Charlotte. 

And so, since cash flow is the life blood of any healthcare revenue cycle management initiative, it is important for physician executives and healthcare administrators to appreciate the impact of modern health information technology systems on this vital function.

Functional Area Targets

Technology plays a key role across all health entity revenue cycle operations. By functional area, the following are key targets:

Patient Access

This is the front-end of a hospital’s revenue cycle. It is made up of all the pre-registration, registration, scheduling, pre-admitting, and admitting functions. Enhancing revenue cycles in this area requires the following:

  • a call center environment with auto dialing, faxing, and Internet connectivity to quickly ensure and verify all pertinent information that is key to correct and timely payment for services rendered;
  • Master Person Index software to eliminate duplicate medical record numbers and assist with achieving of a unique identifier for all patients;
  • registration and admission software that scripts the admission process to assist employees in obtaining required elements and check that insurer-required referrals are documented;
  • denial management definition, including focus on how to obtain all the correct patient information up front while the patient is in-house; and
  • imaging of data up front.

Health Information Management

This is the middle process of a hospital revenue cycle and is often still referred to as “Medical Records.” This area is made up of chart processing, coding, transcription, correspondence, and chart completion. Better control of revenue cycles requires the following recommended technology:

  • chart-tracking software to eliminate manual outguides and decrease the number of lost charts;
  • encoding and grouping software to improve coding accuracy and speed and improve reimbursement;
  • auto printing and faxing capabilities;
  • Internet connectivity for release of information and related document management tasks; and,
  • electronic management of documents.

Patient Financial Services

This is the back-end process of a hospital revenue cycle. The operations include all business office functions of billing, collecting, and follow-up post-patient care. Recommended technology to optimize these functions includes the following:

  • automated biller queues to improve and track the productivity of each biller;
  • claims scrubbing software to ensure that necessary data is included on the claim prior to submission; and
  • electronic claims and reimbursement processing to expedite the payment cycle.

Automation

Automation can lead to decreased paperwork, process standardization, increased productivity, and cleaner claims. In 2004, Hospital & Health Network’s “Most Wired Survey” found that the 100 most wired hospitals — including three out of the four AA+ hospitals in the country — had better control of expenses, higher productivity, and efficient utilization management. Today, these top hospitals tend to be larger and have better access to capital in these times of credit tightening.

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Assessment

The positive return on investment in technology increases allocation of funding to technology. This correlation is important because it begins to link the investment in information technology with positive financial returns in all areas of a hospital’s business, including the revenue cycle.

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How to Hire a Medical Accountant

Posted on September 18, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Seek Healthcare Specificity

Staff Reporters

Use these 25 questions to educate yourself about accountants. And, use this 25-point checklist on how to pick a good healthcare focused CPA. It can be a powerful list for any medical professional and might help you bring in extra money, immediately.

Other Areas

In the areas of estate planning and financial planning, it is essential that doctors have a good team of financial professionals. This usually involves, at the very least, a CPA, an attorney, and a fiduciary focused financial advisor [maybe].

CPAs

If you are a CPA for docs, use this list as a reference for your doctor-clients. By bringing up the concept of due diligence on your own, it strengthens your position and makes a perfect opportunity to ask for referrals. You may also want to use this list as a newsletter insert or advertisement of some sort. Put a brief notice at the top of the list stating that doctors should ask their CPAs these questions, and if they need someone who fulfills these requirements, you would be glad to meet with them to discuss the questions.

Financial Advisors

As an FA, use this list as a networking tool. Refer your clients to a competent CPA who you already do business with or would like to do business with. When you refer clients to a good CPA, you open the opportunity for him or her to return the favor. Send this list to your existing clients at tax time as a neutral third party to help them find a good CPA (they already have a good financial advisor—you).

Attorneys

As an attorney, use this list the same way a financial advisor or account would—to network with the top CPAs and MDs in town. You can make it a standard piece in your mailings or newsletters once a year. When you start giving leads to other financial professionals, it will open up referrals that will be beneficial to your business.

Certified Medical Planner®

And, if you are a CPA, FA or attorney, be sure to promote your hard-won credentials for healthcare specificity; like the Certified Medical Planner® designation, for example.

 25 Questions to Ask Your Future Accountant

  1. What designations or credentials do you have?
  2. Are you in practice full-time?
  3. How many years of experience do you have in tax practice?
  4. Do you do all your returns by computer?
  5. What are your fees, and do you have a schedule that I can see?
  6. Can you provide references from other businesses similar to my own?
  7. Do you use any checklists to maximize my deductions?
  8. How soon do you return calls from clients?
  9. Do you teach any tax courses or have you written for any tax publications?
  10. Are you conservative, aggressive, or somewhere in the middle?
  11. What review process do you use in order to ensure a quality product?
  12. Do you specialize in taxes?
  13. What percentage of your practice relates to taxes?
  14. What other accounting services do you personally perform?
  15. May I look at your tax library?
  16. What do you do after tax season?
  17. How often do you take tax courses?
  18. What is your attitude toward audits?
  19. How do you treat gray areas?
  20. Have you ever been disciplined by the IRS, the SEC, or any accounting society?
  21. How many other clients like myself do you have?
  22. Do you offer pre-year-end tax planning as part of your tax service? If so, is there      an extra fee for this?
  23. Are you generally familiar with current health law and managed care policy?
  24. Do you offer any tax planning during the year?
  25. Can you give me a recent tax planning tip or tax change that may benefit me?

Finally, and most importantly of all; how do all of the above synergize into medical and healthcare specificity, for me?

Assessment

As you likely now realize, this list is not for CPAs only; but as a due diligence reminder for most fiduciary financial advisors professionals or attorneys who wish to work with doctor clients; “often the most difficult clients in the business.”

Disclosure

Dr. David E. Marcinko MBA, our Publisher-in-Chief and former CFP®, is founder of the online CMP® program in healthcare economics, management and finance for advisors www.CertifiedMedicalPlanner.com

Conclusion

Your thoughts, opinions and comments are appreciated.

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Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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Healthcare Focused Tax Attorneys

Posted on August 29, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Avoiding the “Managed Care Ripple Effect”

By Dr. David Edward Marcinko; MBA, CMP™

The healthcare industrial complex represents a large and diverse industry, and the livelihood of other synergistic professionals who advise doctors depend on it as well. These include tax and estate attorneys who themselves wish to avoid the collateral ripple effects of the current healthcare debacle.

Lawyer as Financial Planner

As a tax, estate planning or bankruptcy lawyer, you already know that almost every legal magazine around has articles or advertisements proposing that you become a financial planning professional or business consultant to your physician clients.

Moreover, lawyers of all stripes are being pushed toward interdisciplinary alliances by encroachment on their turf by the Big Four accounting firms. With audits of publicly held companies now a commodity, the giant accounting firms are getting more of their revenues from consulting, and that puts them into direct competition with attorneys, MBAs, actuaries and other management and financial service professionals.

Avoiding a Medical Career

Of all careers, you know how absolutely onerous it is to practice medicine today, and are finally thankful that you did not take that career route many years ago.

So, like your neighbor the accountant, you begin to explore that potential of developing a service line extension to your legal practice, in order to assist your medical colleagues who have been hit on hard economic times. In fact, you soon realize that more than 90,000 trust, probate and estate planning attorneys like yourself are interested in pursuing financial planning in the next decade. Sure, you know it’s difficult to get a CLU or variable annuity license, or become a Certified Financial Planner™ (CFP), but earning your law degree was no cinch either.

And, you reckon, advising physicians has got to be easier than law, or less stressful than the corporate lifestyle of your MBA trained brother-in-law, right?

So, you set out to stretch your legal horizons and explore the basic legal nuances of those topics not available in law school when you were a student.  Things like medical fraud and abuse; managed care compliance audits and Medicare recoupments; OSHA, HIPAA and EPA standards; anti-trust issues; and managed care contract dilemmas or de-selection appeals.

Assessment

What a brave new world the legal profession has become! Even the American Bar Association’s commission on multi-disciplinary practice has recommended that lawyers be permitted to share fees and become partners with financial planners, money managers and other similar professionals.

As a real life example, the venerated Baltimore brokerage firm of Legg Mason Inc. teamed-up a few years ago, with the Boston law firm of Bingham Danna, LLC, to create one of the first marriages between a law and securities firm.  

And so, if you want in on the challenge, and bucks, you’d better acquire at least a working knowledge of healthcare administration, or perhaps help craft some new case law, or assist your doctor-clients in some fashion; otherwise, you will remain a legal document producer.

Disclaimer: Dr. Marcinko, a court approved expert witness and former Certified Financial Planner™, is also founder of the Certified Medial Planner™ program for all fiduciary consultants in health economics, financial planning and medical practice management www.CertifiedMedicalPlanner.com

Conclusion

Your thoughts are appreciated; please opine? Is this new industry concept a viable one?

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Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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Next-Gen Health Accountants and Tax Advisors

Posted on August 19, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Avoiding the “Managed Care Ripple Effect”

By Dr. David Edward Marcinko; MBA, CMP™

The healthcare industrial complex represents a large and diverse industry, and the livelihood of other synergistic professionals who advise doctors depend on it as well. These include CPAs, tax specialists and Enrolled Agents [EAs] who themselves wish to avoid the collateral ripple effects of the current healthcare debacle.

Unappreciated CPAs Working Diligently

The nation’s 330,000 or so CPAs know little about the new healthcare dynamics and managerial accounting mechanics. Many often feel as though they are laboring away in obscurity and that their doctor clients do not appreciate what they do or how hard they work.

If you are a CPA, your workweek is ridiculously long, especially January through April; and you often deliver bad news to your clients. You do not earn a generous salary, but you do receive their ire for your efforts.

The Epiphany

So, you begin to scratch your head and ponder, quietly at first, and then out loud. Perhaps managing the medical practice(s) of a physician, or providing consulting services to other medical professional is a business and financial planning opportunity that won’t require a new client base? You can keep your accounting practice during the first four months of the year, and supplement your income with something that may actually earn more than you are making now. 

A light then goes off in your head, epiphany!  Enter the CPA/PFS designation, exhorting doctor clients to “never underestimate the value”, through an additional 750 hours of financial planning experience and a six-hour comprehensive examination.

New Wave Terms and Definitions

However, new-wave terms such as capitated medicine; per member-per month fixed fees; payment withholds; activity based costing with CPT codes; utilization and acuity rates; and other investment, business and economic nomenclature is likely quite unfamiliar to you.

Furthermore, you may not have the temperament to be a fiduciary, responsible for the financial affairs of others. Then you realize that MBAs and actuaries may actually be the new denizens of the healthcare bean counting and practice management scene. Rather than present numerics of the historic past, they make logical and mathematical inferences about the future. Slowly, you realize that this has occurred because these professionals are proactive, not reactive, as the accounting profession is loosing its premier advisory position within the medical profession.

And, since some doctors are paid a fixed fee amount, regardless of the number of services performed, these futuristic projections are the most important accounting numbers in healthcare today.

Assessment

In fact, your research suggests that as a result, there are now several accountant managers and broker-dealers on the investment scene, as well as an increasing number of accounting-financial planning firms, such as Miller Ray & Houser Business Advisors and CPAs, in Atlanta, who set up a separate investment advisory firm to which they refer clients. 

Moreover, the AICPA is providing encouragement to CPAs who wish to provide more professional client services by building a financial planning practice for the new millennium.

Disclaimer: Dr. Marcinko, a member of the Microsoft accounting network, is Founder of the Certified Medial Planner™ program for all fiduciary advisors in health economics, finance and medical practice management www.CertifiedMedicalPlanner.com

Conclusion

Your thoughts are appreciated; please opine?

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Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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Who’s a Crummey Power Holder?

Posted on August 16, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

IRS Attacks Crummey Powers

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In the [in]famous 1991 case of Cristofani v. Commissioner, the Tax Court ruled that the IRS had improperly disallowed gift-tax exclusions to contingent beneficiary grandchildren while allowing exclusions for withdrawal rights given to the donor’s children. The IRS had reasoned that the withdrawal rights of the contingent beneficiary grandchildren did not constitute gifts of present interests in property.

Literature Review

An article by Lawrence Brody and Stephen B. Daiker, “IRS Questioning Legitimacy of Crummey Powerholders” [Journal of Financial Planning, October 1996, pp. 34–35, Institute of Certified Financial Planners (303) 759-4900], presented the IRS’s position with respect to limited withdrawal powers given to trust beneficiaries to qualify transfers to the trust(s) as annual exclusion gifts.

Technical Advice Memorandum

In a July 1996 Technical Advice Memorandum [TAM], the IRS ruled that none of the withdrawal powers granted in that case were gifts of present interests in property and, therefore, did not entitle the donor to gift-tax annual exclusions. These particular irrevocable trusts did not require that actual notice of the withdrawal rights be given to the beneficiaries, and the powerholders had no beneficial trust interest other than the Crummey power.

Also, notices were given to powerholders only days prior to expiration of the withdrawal period, and the trust bank account was not funded until after expiration of the withdrawal period. The IRS also believed that there was a “prearranged understanding” that the Crummey withdrawal right would not be exercised or that doing so would result in unfavorable consequences—including possible disinheritance.

The IRS position

The IRS position seemed to be that if the powerholder has no economic interest in the trust to provide an incentive to allow the withdrawal right to lapse, the annual exclusion will not, in its view, be available. This common-sense approach to Crummey powerholders unfortunately does not clarify whose rights can or cannot be counted.

Assessment

Most likely, there will be additional litigation or rulings in this area, but it appears that medical practitioners, and their advisors, should ascertain that trusts require actual notice to beneficiaries of limited withdrawal rights; that timely notices and trust funding be provided; and that there be no evidence of a “prearranged understanding” regarding withdrawals.

Conclusion

Your thoughts on Crummey powers are appreciated; please opine and comment. Has the situation changed drastically, if at all, since this ruling?

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Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

Speaker:If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com 

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Innocent-Spouse Tax Relief

Posted on August 13, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

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Getting the IRS Facts

[Staff Writers]

Married physicians and other couples generally choose to file a joint tax return because they get the best tax breaks from that filing status; despite elimination of the “marriage penalty” several years ago.  

However, joint filing has its downside. One spouse can be held fully liable for all the tax due—even if all of the income was attributable to the other spouse. What’s more a divorce does not limit a spouse’s liability—even if the decree requires the other spouse to pay the taxes.

IRS Reform Act

There is, however, a way out: The taxpayer can apply to the IRS for innocent spouse relief. What’s more, the IRS Reform Act, as previously discussed in the Executive-Post, liberalized the rules for obtaining relief.

Get the FAQs

Some time ago, the IRS released answers to frequently asked questions [FAQs] about the innocent spouse rules. The IRS release spells out policies and procedures that apply to innocent spouse requests.

Q. What kind of relief is available?

A. There are three kinds of relief: (1) innocent spouse relief; (2) separation of liability; and (3) equitable relief. Each category has different requirements and procedures.

Q. What are the rules for innocent spouse relief?

A. To qualify for innocent spouse relief, a taxpayer must meet all of the following conditions:

• The taxpayer filed a joint return with an understatement of tax.

• The understatement was due to erroneous items of the other spouse.

• At the time the return was signed, the taxpayer did not know and had no reason to know of the understatement of tax.

• Taking into account all of the facts and circumstances, it would be unfair to hold the taxpayer liable for the understatement.

Q. What are the rules for separation of liability?

A. Under this type of relief, the joint return understatement is divided between the spouses, according to their earnings and assets. To qualify for separate liability, the taxpayer must meet either of the following requirements at the time of the request:

1. The taxpayer is no longer married to, or is legally separated from, the spouse with whom the joint return is filed. For this purpose, a taxpayer is no longer married if he or she is widowed.

2. The taxpayer was not a member of the same household as the spouse at any time during the 12-month period ending on the date of the request. However, a request for separation of liability may be denied if the taxpayer or spouse transferred assets to avoid paying tax or the taxpayer had knowledge of any of the incorrect items when the joint return was filed.

Q. Will the IRS grant a request for separation of liability if a husband and wife are still married, but have been separated for at least 12 months for an involuntary reason such as incarceration or military duty?

A. Separation of liability applies to all taxpayers who have been living apart for 12 months or more preceding the filing of a claim.

Q. What are the rules for equitable relief?

A. Equitable relief is available only if a taxpayer does not qualify for innocent spouse relief or separation of liability. The IRS must determine that it would be unfair to hold the taxpayer liable, taking into account all the facts and circumstances. Unlike innocent spouse relief or separation of liability, equitable relief may apply to an underpayment of tax properly shown on a return.

Q. What factors will the IRS consider in deciding whether to grant equitable relief?

A. The following factors will be considered:

• Current marital status

• Abuse experienced during the marriage

• The taxpayer’s reasonable belief, at the time the return was signed, that the tax was going to be paid

• Current financial hardship

• Underpayment or understatement attributable to the nonrequesting spouse

• Lack of significant benefit received by the requesting spouse.

Bear in mind, however, that this list is not all-inclusive.

Q. What if one spouse forged the other’s name on a joint return? Does the nonsigning spouse qualify for relief?

A. Relief is available, but not under the innocent spouse rules. If a spouse can prove that his or her signature was forged, and there was no tacit consent to the signing, the return is invalid for that spouse.

Q. If a spouse signs an examination report that lists omissions of income, does that mean he or she had knowledge of the items giving rise to the deficiency?

A. No. The innocent spouse rules make it clear that knowledge has to do with what was known at the time the return was signed.

Q. How do state community property laws affect a taxpayer’s ability to qualify for relief?

A. Community property laws are not taken into account by the IRS for purposes of any request for relief from liability.

Q. Do the new relief rules apply to any outstanding tax liability?

A. The rules apply to (1) unpaid balances as of July 22, 1998, and (2) liabilities arising after July 22, 1998, and as amended.

Q. How does a taxpayer request relief?

A. The taxpayer should file Form 8857, Request for Innocent Spouse Relief, along with a statement providing additional information for the IRS to consider. One form can cover multiple years. The IRS will automatically consider all three types of relief when processing a request.

Assessment

It is not know how many medical professionals are familiar with the above; but it is likely very few. That’s why the sage advice of a CPA or tax attorney is always helpful.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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Getting IRS Answers

Posted on July 7, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

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Even When You Shouldn’t Ask

By Staff Writers

Our complex tax system has sparked moves toward a flat tax in 2008 and other efforts at simplification. But until such a change occurs—if it ever does—we are stuck with what we have. This means many doctors and all taxpayers will continue to be confused and uncertain about their tax situations, and they will have a lot of questions.

The IRS Source

According to many experts, the IRS, which should be the best source for doctor answers, does not come through nearly often enough. But, it does offer some options. Which one you choose depends on the complexity and nature of the problem. Some simple, straightforward questions may be readily answered by a phone call. But for questions that are more complicated, it might be better to do it in a letter—following IRS guidelines—and get a written answer. And, in some cases, you may be better off not asking the question in the first place.

Phoning the IRS

Getting through to the IRS can be difficult. Its lines are often busy, especially during tax season. According to a not-so-recent report by the General Accounting Office, only 20% of callers got through to the IRS on the first call during last year’s tax return season (50% eventually got through). The IRS itself says you should avoid calling during lunch hours or on Mondays. But more serious is the reliability of the information you get. And, as a rule, the IRS will not stand behind its oral advice.

Example:

—Emma and James Clarke called an IRS helpline and asked whether they would be taxed on funds they wanted to withdraw from an individual retirement account (IRA) to buy a home. The Clarkes believed that they were told the transactions would result in no tax. So they withdrew the funds. When the IRS taxed them on the withdrawals, the Clarkes went to the Tax Court. They argued that they should not be taxed because they had relied on the erroneous advice of an IRS representative.

The IRS said that the Clarkes had misunderstood. According to the IRS, its representative told them only that they would not face the 10% tax on early withdrawals since they were over age 59½.

The Tax Court had no way of knowing whether the Clarkes had misunderstood or had been given mistaken advice. But the court said it did not matter. The tax law calls for taxes on IRA withdrawals, and the IRS had to follow the law.

Note: The IRS is not legally bound by mistakes its agents may make.

Precautions

The risk of getting incorrect advice does not mean that you should never call the IRS. But you should do some things to protect yourself. In particular, after you get an answer to your question, ask the IRS representative if information on the subject appears in any IRS publication. Then order the publication from the IRS and check the answer you received.

For example, suppose you want to know whether you can claim your father as your dependent. Even if the IRS representative says you can, you would be smart to check the IRS’s Publication 17, Your Federal Income Tax, which sets forth all the requirements for claiming someone as a dependent. Even if the representative is knowledgeable, it’s easy in a conversation for one party to misunderstand the other.

The same basic principles apply if you visit a local IRS office and speak to an agent. You can then easily pick up the publications you need, too.

If you use your computer to surf the Internet, you now can get some forms and basic information from the IRS via the World Wide Web (www.irs.ustreas.gov). But you cannot yet ask questions and get tax help this way.

Writing for Help

You will get the most protection by writing to the IRS with your question, because it will have to send you the answer. Then, if you follow this written advice and it turns out to be wrong, penalties you would otherwise owe will be avoided.

Private letter rulings

—These are among the most common forms of IRS guidance. You would request a private letter ruling from the IRS National Office when you want to know the tax impact of some strategy or transaction you are considering. Such a ruling is like insurance. As long as you give full and accurate details of the proposed transaction, you can rely on the ruling. (You cannot rely on private letter rulings issued to other taxpayers, but you can study them for signs of how the IRS views particular transactions.)

A small medical business might seek a letter ruling to be sure, for instance, that fringe-benefit plans or corporate restructuring will be tax-free.

Example

—A company was engaged in two businesses, A and B. The company needed capital to finance B’s new technology product. It found a venture capitalist willing to invest in B, but not in A. So the company sought to spin off B to a new corporation. The IRS said that there would be no tax on the transaction.

If your transaction will achieve the desired results, the IRS may suggest ways you can fix it. If the IRS plans to issue a negative ruling, it may offer you a chance to withdraw your request.

Technical advice memos

—Similar to letter rulings, these also come from the IRS National Office but are most often requested when a technical question comes up during the course of an audit. IRS agents themselves regularly request them. But, as a taxpayer, you can request such advice yourself. Technical advice memos are usually retroactive, but you can request relief from retroactivity if it would hurt you.

Technical advice memos may be issued on some of the same matters as letter rulings. Typical memos deal with such issues as whether a medical office worker is an employee or an independent contractor, validity of pension plans, and use of accounting methods.

Example

—A repairman had worked in an auto body shop for several years. Originally, he was classified as an employee. Then the shop owner turned the business over to his son, who designated the worker as an independent contractor. But the worker’s job did not change. He worked eight to 10 hours a day at the shop, using some of his own tools—but also some of the shop’s tools and equipment. He was paid half of the total amount of the bill for the repairs he did. But receiving his pay did not hinge on whether the customer paid; he took no risk. The IRS ruled in a technical advice memo that the worker was an employee.

Example

—A company asked the IRS to rule on whether its pension plan was qualified for tax breaks. The IRS said yes. A year later, the IRS realized the plan violated the rules because it excluded some workers who put in more than 1,000 hours a year. In a technical advice memo, the IRS said that the company would have to amend the plan to comply with the tax law. But because the company had relied on the IRS ruling in good faith and had originally disclosed all of the facts, the change did not have to be made retroactively.

When Not to Ask

There is no reason not to call the IRS with a basic question so you can fill out your tax return correctly. You probably will not even have to give your name. But if you want a letter ruling, first weigh the pros and cons.

In some situations—for example, to change your accounting method—you must get an advance ruling. In other cases, an advance ruling may be desirable because you want to be sure of the tax consequences of a transaction. Moreover, as we said, the IRS may suggest ways to restructure the transaction to get the tax result you want.

However, sometimes it’s unwise to seek IRS advice. You may not have time for a ruling—they generally take two or three months. Or, if the transaction offers no chance for flexibility, you will be stuck if the IRS gives you a negative response. (You must attach the ruling—favorable or not—to your return.) The National Office will review all related issues and transactions when it examines your request. So you must also be sure such scrutiny will not create a problem for you.

Cost is another factor. Fees vary by type of ruling, but a typical one would be $500. Then you need professional assistance in preparing your request and responding to IRS questions.

Assessment

The IRS will not answer every question. It will not give you a “comfort ruling”—where the answer is clear or reasonably certain. And it will not rule in hypothetical situations.

Letter rulings are public information, but you don’t lose your privacy. The IRS will have you sign a deletion statement: You can tell it to block out items that would reveal your identity. Most all physicians and medical professionals should do this.

Conclusion

Your comments are appreciated. What has been your experience with IRS queries?

Related Information Sources:

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Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Physician Advisors: www.CertifiedMedicalPlanner.org

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“S” Corporation [Case Law] Tax Advantages

Posted on July 6, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Family Owned Business [FOB]

Staff Writers

fp-book1

Some doctors understand the advantages that S corporations have over regularly taxed C corporations—and vice versa. But, an unfamiliar Tax Court decision, more than a decade ago, points up an advantage for S corporations that are sometimes overlooked.

Scenario

Suppose the owners of a family corporation are about to retire. Their children will buy their stock, giving them a note for the purchase price. The children will, of course, pay interest on the note.

Tax Difference

If the corporation is an S corporation, the younger generation will be able to write off their interest payments in full.

On the other hand, if it’s a C corporation, they may have few or no deductions.

Why the difference?

—Because interest you pay to buy S corporation stock is considered “business” interest, and that’s fully deductible. On the other hand, interest paid to purchase C corporation stock is treated as “investment” interest. And the tax rules say that investment interest is deductible only to the extent of your investment income (dividends, interest income, etc.). If you don’t have any investment income, you get no deduction for your interest payments.

Naturally, that brings up another question: Why is the ownership of a C corporation considered an investment, while the ownership of an S corporation is treated as a business? For the answer to that, let’s look at the above mentioned Tax Court case.

Case Report

Three brothers, Milton, Leo, and Dale Russon, founded Russon Brothers Mortuary as a regular C corporation. The business did well, and the Russon brothers began training their four sons, Scott, Brent, Robert, and Gary, in the mortuary business.

Eventually, the four younger Russons were trained and actively involved in the business, and the older Russons were ready to hang up their hats. The younger Russons agreed to buy all the stock in Russon Brothers for $999,000. Each of the four younger Russons agreed to pay one-fourth of the purchase price, with 10% payable up front and the remainder to be paid in 180 equal monthly payments at 9% interest.

Agreement

The agreement gave the four younger Russons their right to exercise ownership rights, including “the right to all dividends from the stock,” subject to certain limitations. One of those limitations provided that the buyers could not “declare or pay any dividends or make any distributions” without written permission from the older Russons. After the sale, the four younger Russons continued to run the mortuary business, and their fathers retired.

On his tax returns following the sale, Scott Russon deducted the interest he paid on the purchase price for the Russon Brothers stock. However, the IRS denied the deduction on the grounds that the interest was subject to the investment-interest limitation.

Scott Russon countered that his interest should be treated as fully deductible business interest. After all, he bought the stock so that he and the other younger Russons could conduct the business full time and “earn a living.” Moreover, he contended that he couldn’t have purchased the stock as an investment since Russon Brothers had never paid a dividend in its entire history.

Tax Payer Loser

The Tax Court concluded that the Russon Brothers stock was “held for investment,” and the interest paid to acquire the stock was subject to the investment-interest limitation [Russon, 107 T.C. No. 15].

The court pointed out that property “held for investment” includes any property of the type which produces interest, dividend, or royalty income. And, in the court’s view, that means property that normally produces those types of income—regardless of whether it actually produces such income.

The tax law does not require corporate stock to pay a dividend before it becomes investment property. What’s more, the court pointed out that the definition of investment property is inclusive and applies uniformly to every taxpayer; it does not depend on a taxpayer’s mind-set when buying the property.

Finally, the court pointed out that the possibility of the Russon Brothers stock actually paying dividends was clearly contemplated by all the Russons when they drew up the sales agreement. The agreement gave the younger Russons the right to “all the dividends from the stock,” subject only to the written consent of the older Russons until the purchase price was fully paid.

S Corporation Advantage

If Russon Brothers had been an S corporation; it would have been a different story. The IRS has said that interest paid to buy an S corporation is treated as interest to purchase the corporation’s assets, not its stock [Notice 89-50]. Thus, the interest the Russons paid would have been treated as fully deductible business interest to the extent the assets were used in the corporation’s business [Notice 88-20]. And since virtually all of Russon Brothers’ assets were used in the active conduct of its mortuary business, Scott Russon would have been entitled to his deductions.

Assessment

There is one bright spot for astute doctors and other buyers of C corporations. You can switch. The IRS has ruled that once a C corporation is converted to an S corporation, interest paid thereafter will be treated as paid for the assets, not the stock. So your interest will become fully deductible business interest [Ltr. Rul. 9040066].

Conclusion

Of course, switching to an S corporation has other important tax consequences. So you will want to talk things over with your tax adviser before making a final decision. And so, your thoughts and comments are appreciated.

Related Information Sources:

Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

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Worthless FOB Stocks

Posted on June 27, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Getting the Tax Deduction

Staff Writers

All physicians and other investors should know when their stock becomes worthless.

Example Scenario:

Some time ago, an FOB physician investor [Family Owned Business] founded two FOBs: One was doing fine while the other floundered. Under the IRS Tax Code, the investor can receive a loss deduction on the second FOB if: 1) the stock is worthless, and 2) the loss is claimed in the year it became worthless.

Definition of “Worthless”

The problem often is determining when a stock is completely “worthless”—there is no deduction for partial worthlessness. A company does not have to file for bankruptcy or end operations for its stock to be worthless.

Generally, if an FOB’s liability greatly exceeds its assets, and there is no real hope of continuing the business at a profit, the stock is considered worthless under the Tax Code. Often, to prove a worthless loss deduction, the business owner sells his or her stock at a nominal price.

Loss is Limited

The amount of the loss has traditionally been limited to the business owner’s tax basis. Capital losses are used to offset capital gain, but $3,000 can be used as a deduction against ordinary income. The $3,000 can be carried forward indefinitely.

Section 1244

If the business’s stock qualified as Section 1244 stock, the loss is an ordinary and fully deductible loss (subject to dollar limitations). In these cases, the loss is deductible against ordinary income. Obviously, if a loss is deductible against ordinary income in the first year, the taxpayer will receive a significant tax savings.

Most FOBs issue Section 1244 stock if it is qualified as a “small business corporation.”  To qualify, the total capital invested at the time the stock is issued cannot exceed $1 million. In addition, the FOB must have less than 50% of its gross receipts from passive sources: rents, royalties, dividends, and investment income.

In other words, the majority of the receipts must come from operating an active trade or business. Finally, the maximum loss is $50,000 for an individual; $100,000 for a couple. When organizing an FOB, the stock should be classified as Section 1244 stock if it qualifies.

Assessment

Financial professionals and accountants must advise their clients about “worthless” FOB stocks to ensure the deduction is claimed. Medical professionals should also be aware of this concept.

Conclusion

Have you ever had a worthless stock? How did you deal with it and what were your experiences? What has changed relative to the above review, if anything? Is Section 1244 indexed? Please opine and comment.

Related Information Sources:

Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

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About Tax Record Retention

Posted on June 23, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

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Which Ones to Keep—How Long?

[By Staff Writers]fp-book2

By law, we are all required to keep records the IRS could use to determine our tax liability accurately. And doctors, more than most, know what it’s like to keep records. So you should retain whatever papers and documents support or clarify your calculations. If the IRS thinks you owe it money, you—both as an individual taxpayer and as a medical business owner—must prove it wrong. Your records are your only real protection if the IRS sets its sights on you for an audit.

Query: But what papers? And how long does the IRS have to determine your taxes for any given year? Do you have to keep everything forever? He following information may provide some clarity to this query.

Individual Tax Records

Accuracy means more to the IRS than the form of recordkeeping you use. Even more important is thoroughness. While certain papers are more significant than others, all of them together build your case for stated adjusted gross income, taxable income, deductions, exemptions, etc. For example:

Income:

Your medical, and other, employment-related records are top priority. The basic ones are W-2s from your hospital, clinic or medial practice, W-2P (for recipients of pensions, annuities, and IRA payouts), and 1099s for freelance income, speaking and pharmaceutical fees, and royalties, etc. You will also need 1099s that show interest and dividend income, as well as stock brokerage statements and any other documents that contain information pertaining to the amount you report as income.

Deductions

Generally, to back up your various deductions, the records you keep should include all related canceled checks and receipts. Here are some specific deductions and their requirements:

Medical expenses:

Keep all canceled checks and receipts. Keep records of any expense reimbursed or paid directly by medical insurance and medical insurance policies on which you deduct the premium cost. The person on whose behalf payments were made should be noted on every check, bill, and receipt.

Mortgage interest:

Keep bank (or mortgage company) statements, notes, and canceled checks.

Child-care credit:

Maintain a record of the name and address of the person or center providing the care, copies of canceled checks, and receipts to verify costs, and amounts paid for household services during the year. The latter will allow you to differentiate costs if the IRS tries to claim your child-care payments were really for a housekeeper. If you pay an individual to provide child care, keep a record of his or her taxpayer ID number, since you need that to get the credit.

Alimony:

You should maintain a copy of the divorce decree, separate maintenance agreement, or other document that specified the basis for the payments; name and address of the ex-spouse to whom you made payments; and canceled alimony checks. If you made payments indirectly through insurance policies, annuity contracts, or endowments, keep the documents showing the source of the payments.

Charitable contributions:

To prove charitable contributions, keep canceled checks and receipts showing the donee’s name, plus the date and amount of the contributions. If you don’t have a check, you need other reliable records showing the same information. If contributions are made by credit card, keep the receipt, the bill, and a statement from the charity with the required information. If you make a contribution of above certain periodically indexed thresholds, or more, to a particular charity, you must get a written acknowledgment from the charity (letter, postcard, etc.). A canceled check is not enough. Generally speaking, if you make separate deminimus contributions each year, the written acknowledgment rule may not apply.

A donation of property will complicate recordkeeping. You need the same items as above, plus a description of the property and the place you made the contribution. You should also keep documents showing the method you used to determine the fair market value of the property, with a signed copy of appraisal reports, if any. If you have an agreement with the charitable organization regarding the use of the donated property, hang on to a copy of that as well.

For property, you will also need documents showing how and why you acquired the property and your cost or other basis (except for publicly traded securities) if you held it for less than one year. For property valued over certain thresholds, you must get a qualifying appraisal and keep a copy of the report

IRS

Business Tax Records

As a medical business owner, your recordkeeping requirements are more substantial. There are so many more soft spots where the IRS can probe. The following areas are of particular importance:

Depreciation:

Keep any records needed to establish the reasonableness of a depreciation deduction, such as the original sales receipt showing what you paid for the property. Records must show the yearly depreciation claimed.

Withholding:

Keep all compensation records. For each employee, show name, address, job, and Social Security number, total amount and date of each wage payment, and any other type or form of payment; amount of wages subject to withholding; amount of tax collected; employee W-4 forms; and any agreement with employees regarding additional withholding.

Travel and entertainment:

The IRS does not accept estimates. You must keep itemized bills and receipts, Back them up with a diary showing cost, time, place of travel or entertainment, business purpose, and business relationship of guests.

Also, you must keep a log of your business use of items, such as a car, pager, computer, or server; or PDA, ipod or cell phone, etc., that you use partly for business and partly for personal purposes. For travel, your diary should show the date of departure and return, plus how many days of the total trip were spent on business. If you are an independent medical contractor, keep a diary of your daily work activities. This will reinforce the specific items and pull them together.

How Long to Retain Records?

By law, you have to keep tax records “as long as material” to the administration of the tax law. Since the statute of limitations runs for three years from the time you file your return or the due date of the return (whichever is later), and the IRS is free to audit your return during this time, you want to keep the records at least that long. After an assessment, the IRS has six years to begin collecting, so you are up to nine years. But you then have two years to claim a refund after payment, giving you a grand total of 11 years.

This may seem extreme, and not everyone keeps records that long. Many individuals keep records for six years—the amount of time the IRS has to audit if it suspects a gross error—an underreporting of 25% or more of the gross income shown on your return.

The 11-year time frame is the maximum time frame for assessment, collection, and refund claim. Business owners would be wise to use that period as a rule of thumb, even if individual taxpayers don’t.

Homeowners—

Keep any documents connected to home ownership that have a bearing on your taxes, if any, for the entire time you own your home. If you sell your home, keep the documents as long after the last tax filing as they have a bearing on your tax records. Remember the newer rules for homeowner tax exemption.

Withholding—

These records are subject to a special four-year retention rule. Most doctors and medical business owners keep them longer.

Fraud

In the case of fraud, there is no limit on the time the IRS has to charge you. But here, the burden of proof shifts to the IRS, and you get the presumption of innocence. So you need not feel you have to keep records forever to protect yourself against such an accusation. 

Conclusion

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Dining and IRS Induced Gastroenteritis

Posted on June 20, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

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Doctor’s Beware Taxation on Rebates

[By Staff Writers]

In the past decade or so, several companies has been marketing a culinary twist on airline frequent flyer programs—a kind of frequent-eater program.

Under the program, doctors who love to hold “business meetings”, and other diners use their regular credit cards to charge meals at participating restaurants, and the program sends them a rebate check for 20% of the bill.

Not All Gravy

While a 20% discount on restaurant meals sounds appealing to most everyone, you should be aware that it’s not all gravy. In some cases, the IRS is likely to take the position that those rebate checks represent taxable income to a medical executive who is using the program for business dining.

The IRS has not specifically addressed the issue of rebates on restaurant bills. But, in a private letter ruling back in 1993, it did give examples of when cash frequent flyer awards will be taxed [Ltr. Rul. 934007]. Here are some examples:

Example 1—

Your medical practice buys you tickets for a medical conference trip. The tickets entitle you to a cash payment under the airline’s frequent flyer program. If you do not turn the cash payment over to your company, the IRS says you have received a taxable fringe benefit.

Example 2—

You pay for air flights for which you take a business expense deduction. You subsequently receive a cash frequent flyer award. In this case, the IRS says you have taxable income to the extent that your prior deduction saved you taxes.

Back to the Table

Now, let’s get back to the discount dining program. By analogy to the IRS rulings, if you are reimbursed by your practice for the full amount charged on your credit card, the IRS will view the 20% rebate check as a taxable fringe benefit that must be reported on your tax return.

Or, suppose you are a self-employed doctor and take a deduction based on the full amount of the meals charged on the credit card. The cash rebate would be taxable to the extent the deduction produced tax savings. (Note: Since only 50% of the cost of business meals is deductible, only 50% of the rebate check will have produced tax savings.)

Practice Angle

How your medical practice decides to address the issue of dining discounts may be more a matter of tactics, than taxes.  In theory, allowing its employees to pocket their dining discounts could jeopardize the tax-free treatment of business meal reimbursements for all employees.

For example, in a 1995 ruling, the IRS said that a company’s travel reimbursement arrangement did not qualify for tax-free treatment because employees were permitted to retain frequent flyer awards for their own personal use [Ltr. Rul. 9547001].

However, the ruling aroused a storm of controversy, and higher-ups at the IRS quickly announced that they would reconsider the ruling in limbo. But, it is very likely that the company in question triggered its own tax troubles by making the right to retain frequent flyer miles an official part of its reimbursement plan, rather than an unofficial “perk” for employees.

***

IRS

***

Assessment

The IRS may be less likely to raise the tax issue if a medical practice plan has no policy on rebates and awards, or officially requires employees to account for them to the company. And so, is this an example of the “friendlier IRS” that a former tax-commissioner spoke about, or that was mentioned in a previous Medical Executive-Post? Did we miss anything else? Has anything changed recently? Please opine and comment?

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Selecting Tax-Return Preparers

Posted on June 16, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

What Doctors Need to Know about Preparers

Staff Writers

Most doctors and medical professionals are not thinking about tax season right now. But, according to Executive-Post supporter Rachel Pentin-Maki; RN, MHA “now may be the best time to rethink your relationship with your tax-preparer.”

All Tax Preparer’s not equal!

All tax return preparers are not the same. They possess varying levels of expertise and hold different credentials. If you are thinking about hiring a new tax preparer to do your 2008 return next year, you may want to begin your search soon so you have sufficient time to investigate and evaluate your options.

Specialty Needs

If you are aware of any significant tax issues when doing your return, find out if he or she has expertise in this area. For example, a recently divorced single father will want a tax return preparer that is knowledgeable about the tax ramifications of divorce and how it affects his return. Similarly, if you’ve recently sold a rental property at a loss, you’ll want a preparer who can advise you on reporting that loss.

Of course, medical specificity is paramount. An accountant who has many doctor-clients is a good start, but does he/she really know anything about activity based medical cost accounting?

Experience Counts

It’s usually wise to select a preparer who has been in the tax business for at least several years. However, should you opt to go with a less experienced preparer, be sure that individual has access to more experienced professionals who can address any complex tax issues that may arise during the preparation of your tax-return?

Types and Stripes

The complexity of your return, and not necessarily the amount of your income, should guide you in selecting a tax preparer, and resulting professional fees. Essentially, there are five types of preparers:

Certified Public Accountants (CPAs)—

These accountants have passed a rigorous examination which includes an entire section on tax issues. Many specialize in taxes and are experienced in handling complicated tax issues. In addition, if they are members of the American Institute of CPAs [AICPA], they must meet stringent continuing education requirements to maintain their memberships.

Commercial Agents—

These individuals work for large national organizations. They usually work only during tax season and have been trained by the organization. Most are form-driven. They are not, however, required to have a minimum level of education, nor have they passed an exam administered by a regulatory body.

Enrolled Agents—

These tax return preparers must pass a two-day examination given by the Internal Revenue Service or meet an lRS experience requirement. In addition, members of the National Association of Enrolled Agents or its state chapters must take at least 30 hours of class work in tax matters each year.

Public Accountants—

Many public accountants are tax advisers. These individuals have not taken the exams and are not obligated to meet the experience requirements of CPAs. In some states, public accountants must be licensed, but in others, anyone can claim the title.

Tax attorneys—

Like CPAs, tax attorneys must meet continuing education requirements and are subject to regulations by the states where they practice. Most tax attorneys don’t specialize in tax return preparation. Instead, they tend to be more involved in tax planning and tax litigation.

Fees

Some tax return preparers work for a fixed fee while others charge hourly rates. In either case, be sure to clarify in advance how much or on what basis the preparer will charge you to do your return. Keep in mind that it’s up to you to provide the preparer with the information necessary to do your return. Unorganized or missing files and receipts are likely to result in more work for the preparer and higher costs for you.

Assessment

Keep in mind, too, that only enrolled agents, CPAs, and tax attorneys are authorized to practice before the IRS. This means that they can represent you throughout the entire IRS audit process; commercial agents and public accountants may not.

Conclusion

What has been your experience with the above accounting types? Is medical specificity really required? Please comment, opine and send us your “tax preparer war-stories.”

Related Information Sources:

Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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Corporate Minutes and IRS Tax Savings

Posted on June 11, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

It Pays for Doctors to Keep Good Records

By Dr. David Edward Marcinko; MBA, CMP™

[Publisher-in-Chief]Dr. David E. Marcinko MBA

More than a few medical professionals have ownership in small corporations outside of their medical practice, or day-job as physician-healers. More are contemplating same, as the healthcare insurance crisis grows, and the social and economic swagger of physicians decrease.

Small Corporations

But, some of these doctor-involved small corporations generally are not too formal in their day-to-day operations. Formality could even interfere with effective functioning of the emerging matrix business environment. On the other hand, doctors are notoriously stubborn, egotistical and business directors, officers and shareholders are usually the same few people. They are in contact daily. They might easily agree on a capital expenditure during a chance meeting in the stairwell, hospital, clinic, medical office or golf course,

Annual Meetings

But, if the formal procedures of large corporations seem out of place in the closely held corporation, holding an annual meeting and recording all matters in corporate minutes is not as pointless as it may appear.

Accurate and complete corporation minutes can produce real tax savings. The IRS keeps a sharp watch on closely held corporations. Corporate minutes can provide an excellent—and sometimes the only—defense against possible unfavorable tax consequences.

How Minutes Count

Corporations often enjoy a favorable tax rate compared to their owner’s personal rates. They also benefit from deductions and credits an individual or unincorporated business cannot get. But, to get all the tax benefits due you, you should make business decisions in a way that shows sound business purpose and intent. Your corporate minutes are proof of your good intentions should you ever be audited by the IRS.

Corporate Minutes

Corporate minutes have a particular format, just as the problem orientated medical record [POMR] that we are all familiar with, has its own style. For example, corporate minutes, along with receipts, invoices, and correspondence, serve as evidence in several important areas: 

Executive Compensation

Your minutes should show that any salary increase for an executive or officer has been formally approved and ratified by the board of directors. The basis for the raise should be noted in detail. Minutes should include relevant factors which can justify a raise such as: expanded job duties and/or time, contributions to company growth, and the need to match competitors’ salaries.

The minutes should also describe the scope of the job and what the increase will be. Such information is designed to satisfy the IRS and the courts that the compensation is reasonable and the increase is legitimate. With this information, the IRS is less likely to suspect that you are using a raise to disguise a dividend. Both dividends and compensation are taxable to the recipient. But dividends, unlike compensation, cannot be deducted by the corporation.

Date Protection

Dates of the minutes that support the increase can be extra protection. The minutes can show that the decision was made and implemented well before year-end earnings could be accurately projected. Large raises or across-the-board increases granted close to year end, when earnings are high, lead the IRS to see dividends in disguise.

Loan Verifications

Corporate minutes also verify that loans made to executives are loans and not taxable compensation or dividends. They also confirm the nature of such corporate largesse as gifts to individuals (such as to the surviving spouse of a deceased senior executive). Since the IRS considers intention in business actions, your minutes can show that you have sound business motives from the start.

Keep in mind, however, that loans from the corporation to employee/ shareholders must meet other criteria. Nothing you have in writing, including the minutes, will win the day if your loans appear to be dividends. If you fail to repay them, pay interest on them, provide collateral, etc., there is a good chance the IRS will rule that the advances are dividends.

Excess Accumulated Earnings

Corporations can accumulate earnings of up to certain indexed limits. Anything above that may face an excess accumulated earnings tax. Under some circumstances you may keep earnings above the limit without penalty; this is common in scientific and health technology fields. Some of the acceptable reasons for excess accumulation are:

• plans to expand or diversify

• plans to buy new equipment or build up inventory

• projected investment in business-related properties

• to maintain working capital as a hedge against borrowing

• to make loans needed to maintain business

• to provide for actual-potential lawsuits, contested tax or profit loss

• to meet profit-sharing and pension plan obligations

Your plans can be immediate or long-range. They just have to be for a reasonable business purpose. Dates when plans were made and details as to their implementation, when included in corporate minutes, supply proof of that. If you include estimates, market analysis, receipts, and other related documentation of the purpose as part of the record, you will add weight to your case.

Step Transactions

Corporate minutes can also perform the same function for step-transactions. Step transactions consist of steps taken over time toward achieving one objective. Such plans, if recorded in your corporate minutes, can justify your holding on to excess earnings without tax penalty. Even if the plan is abandoned at any “step,” you can state the reasons in your minutes and effectively forestall a penalty.

Retirement and other Pension Plans

To obtain maximum tax savings for your business and your employees, any pension, profit-sharing, or stock-option plan has to satisfy IRS rules. If it does, your employees defer taxes on your contributions and their investment earnings until those funds are distributed to them. Your corporation gets a tax deduction for its contributions.

To get IRS approval, you must submit documentary evidence supporting your plan along with your application. Your corporate minutes supply some of that evidence. They should show the date the plan was adopted and ratified, contain figures demonstrating financial ability, and show that the plan was intended to be permanent. Once you have obtained IRS approval, your annual contributions should be detailed in succeeding corporate minutes to protect your corporate deductions.

Dividends

Your corporate minutes play a part in determining the taxable nature of dividends. Generally, a dividend paid out in the form of stock isn’t taxable to the shareholder until the stock is sold. Dividends paid in cash or property is taxable income in the year they are paid. But if shareholders can choose between taking a dividend in stock or in cash or property, the dividend is taxable to them no matter which method they elect.

To settle such tax questions (and get the best tax results for you), your corporate minutes should clearly reflect the form of dividend being offered to stockholders.

Mergers, Consolidations, etc

To earn tax-exempt status, the minutes must show that a merger or other action serves a bona fide business purpose. It’s OK if the merger will save you taxes, but there must be a business reason as well. For instance, the reorganization will enable you to cut costs, or the merger will bring needed technical skills to the business. The minutes should include a specific plan for the transaction and how it is to be carried out.

Corporate Meetings

One reason for a closely held corporation to hold a “formal” annual meeting is to create corporate minutes. Tax advantages can be further ensured by holding other meetings and recording minutes whenever any major business decision is made. Neither a board meeting nor the corporate minutes recording it need be elaborate or time-consuming. There is not a required format for minutes. Their value lies in what they say, not how they say it, although accuracy and clarity count.

One company officer must be the “secretary,” responsible for calling the meeting, notifying members, drawing up the agenda, and distributing it in advance. The secretary is also responsible for recording the date, time, and place of the meeting, the attendance, and all important matters settled (although someone else can physically take the notes). After the minutes have been prepared, the secretary distributes copies to all board members (and the company attorney). Getting their signatures on the minutes isn’t necessary but can be helpful.

Assessment

Don’t waste time trying to record every point that’s brought up at the meeting. Enter only final decisions. In a closely held corporation, most of the discussion has probably preceded the actual meeting. The meeting serves only to formalize those final decisions—and essential details—for the record.

Conclusion

What is missing from the above, if anything? Your experiences and comments are appreciated.

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IRS Offers-in-Compromise

Posted on June 10, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Understanding the IRS Tax Reform Act

By Staff Writers

In 1998, the IRS received 105,255 offers-in-compromise, but accepted only 25,052 offers—a mere 24%; and the exact number for medical professionals is unknown.

The IRS Reform Act

However, the IRS Reform Act later revamped the provisions for offers-in-compromise and the IRS, reacting to the changes, announced that it would be more flexible in considering offers-in-compromise in the future. In addition, under new rules, taxpayers can have up to two years to pay the accepted compromise amount.

Re-trained Staff

The IRS now trains staff specifically to handle such offers. In accordance with the Act, rejected offers will be reviewed to determine whether the action was in the best interest of the taxpayer. The IRS has updated Form 656 to process the offers.

Submitting the Offer

When submitting an offer-in-compromise, the offer must specify the maximum amount a taxpayer can pay after taking into account basic living expenses. Essentially, this means the IRS will consider each taxpayer’s financial situation individually. But, college education for children is an expense most people pay, yet the IRS generally does not factor in educational expenses when determining a taxpayer’s living expenses. .

In the past, the IRS relied on a standard cost-of-living formula to determine what taxpayers could afford, not on each taxpayer’s own expenses.

The IRS automatically can accept offers if: 1) there is doubt about the liability for the tax, and 2) there is doubt that the taxpayer can ever pay the full amount of the tax. If a taxpayer is claiming there is doubt about the liability, the taxpayer will need the help of a tax professional to spell out the rationale for his or her position. If the offer is based on inability to pay, the financial information in the worksheets to the IRS, Form 656, should be completed.

Quick-Sale Value

Remember, as a medical professional or other, the IRS can consider the taxpayer’s future income, as well as his or her current assets when evaluating an offer. Individuals can exclude certain minimum assets of household effects, and trade and business tools. The value of the taxpayer’s assets is based upon a “quick-sale” valuation. Again the taxpayer may need to help to justify his financial position.

The key is determining the full value of the assets and the discounts for quick sales, in addition to the taxpayer’s living expenses. An amount higher than the IRS standard generally cannot be permitted. Again, this will be based on the taxpayer’s documentation.

Collection Procedures

The IRS’s ability to begin collection procedures while an offer-in-compromise is under consideration has been sharply limited by the Act. This is true even if after an offer is rejected, but the taxpayer appeals the decision.

Cash offers must be paid within 90 days of acceptance. For deferrals, payments must be made within two years after the offer is accepted. Alternately, the taxpayer can pay the offer over the statutory period for collecting the tax.

Innocent Spouse Rule

The IRS also has added innocent spouse relief to offers-in-compromise, so now the IRS will not collect from a taxpayer’s spouse if the taxpayer defaults on his or her compromise agreement.

Assessment

As noted previously the taxpayer has a right to appeal rejected offers. In addition, he or she can submit another offer. But, in the end, only time will tell if the IRS remains taxpayer friendly.

Conclusion

Your thoughts and experiences are appreciated; please comment and opine. Is this a real or perceived new IRS OiC ploy? IOW: The gentler side of Uncle Sam? 

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Alimony versus Child Support

Posted on June 9, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Tax Consequences for Physicians

[By Staff Writers]

Tax considerations are critical when preparing divorce agreements; and an understanding of the applicable sections of the Tax Code is essential for all medical professions in this situation.

In short, alimony is deductible for the payer while child support is not; so it is important for a separation agreement to stipulate that taxpayers report the payments in the same manner. If the person making the payment reports it as alimony, the recipient must include it in income.

The IRS Code Rules

However, when determining whether payments made to a former spouse are alimony or child support, the IRS looks not merely at the agreement, but at how the payments are used. The Code has specific rules for alimony. The payments must be: 

  • Made pursuant to a divorce decree or separation agreement,
  • Made by a payer who is not living in the same household as the recipient, and
  • Payments may not extend beyond the lifetime of either the payer or the recipient.

The last provision can be a trap under some divorce decrees. For example, a doctor makes monthly installments designated as alimony. However, lump-sum payments also designated as alimony are payable under the agreement. In some states, such payments must be made even if the former spouse dies. Alimony payments are not deductible when made to a former spouse after he or she has died.

Front Loaded Payments

In some divorce decrees, alimony payments are front-loaded. Large alimony payments are made in the early years, and then payments dwindle later on. The IRS sometimes challenges whether these arrangements actually are alimony. Property transferred during marriage that is incident to the divorce is not alimony. Such transfers have no tax consequences and should not be claimed as alimony.

Exceptions

While most physician-payers want support payments to be deductible, there are exceptions. In a recent case, the divorce decree ordered one spouse to pay alimony. However, the payer had very little taxable income. Most of his income was from tax-exempt bonds. After negotiations, it was agreed that the payer would not take the alimony deduction, and the recipient spouse would exclude the payment from income.

Child Support

Child support is not deductible for the payer, and the recipient may exclude it from income. However, the parent who has custody of the child or children receives the dependency exemption, but the parties can agree that the payer will receive the exemption(s), provided he or she contributes more than 50% to the costs of the child’s support.

For the non-custodial parent to claim the dependency exemption(s), IRS Form 8322 must be signed by the custodial parent and filed with the IRS. But, you may claim the exemption in alternating years, if you wish.

Assessment

In sum, when negotiating a divorce settlement, there are a number of tax traps to avoid. In some cases the payer may not want alimony payments to be deductible. In other cases payments designated as alimony may not qualify under the Code. The medical business advisor and attorney must determine what is best for his or her client.

Conclusion

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Hospitals Auctioning Patient Debt

Posted on June 9, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Online Sale of Patient ARs

Staff Reporters

In another sign of the contracting economic times, FierceHealthFinance is reporting that some struggling hospitals are using the internet as a new channel to cut their write-offs, and bad debt ratios which lower stock prices, if publicly-held.

Exit the Debt Collectors – Enter the Auctioneers

Rather than simply hiring agencies to collect patient bills, some hospitals have begun to put ARs up for auction online. Bidders on the debt include the same agencies that serve the hospitals, some of which provide guaranteed payments to hospitals in exchange for access to the debt. The auctions are also attracting other companies that buy the debt outright.  

Intermediary Channels

Many of these auctions are run through intermediary channels like www.ARxChange.com, a TriCap Technology Group site; while others use www.medipent.com Medipent LLC. The companies vet collectors to see that they will use the right tactics before participating in auctions, and also, try to make sure they comply with the hospital standards for collections. Also, hospitals have the final say over who bids on their accounts.

Critics

Despite safeguards, some critics argue that auctions change the dynamics of hospital collections, unfavorably. Usually, collectors are paid a percentage of what they collect, sometimes more when they collect more. But, in many of these cases, winning bidders get to keep all of the money they collect. This gives them a greater incentive to be aggressive in their tactics, according to the Wall Street Journal.

Assessment

When will debt-auctioning filter down to the individual clinic and medical practice level? “It is only a matter of time”, according to industry expert Hope Rachel Hetico; RN, MHA, CMP™ of Atlanta, Georgia

Conclusion

Your thoughts, opinions and comments are appreciated?

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Project Manager and Assistants Wanted

Posted on May 5, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Atlantic Logistics; L.T.D.

A European leader in the transportation business is seeking experienced and professional Project Managers and assistants. There is an immediate need for experienced individuals. Strong computer, organizational, communication and presentation skills with a reliable work ethic is required.

Additional Requirements:
– US Citizens;
– Fluent in English (spoken and written);
– A PC user (MS Office, MS Windows), Internet and e-mail skills;
– High communication skills;
– Credit score over 650 (Experian, Equifax and Trans Union)
– Honest, active, operative and highly responsible.
Employment Terms:
– Position is available in: USA, ALL STATES
– Fixed salary: $ 50,000 per year + additional commissions
– Position is available: full-time/ part-time
– A permanent contract;
– After the first successful project you receive i-phone as bonus, to be always available.

atlanticlogisticsltd@gmail.com
Thank you
Peter Trabes
HR Director
atlanticlogisticsltd@gmail.com

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Hospital Stock and Taxes?

Posted on May 1, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Q: I am a hospital employee. What are the ways that I can acquire stock in my public company without current cash activity; i.e.; taxes; any thoughts?

For example, at this time I do know it is important that any loans be subject to full recourse liability.

I also understand that if the loan is secured by the stock on a non-recourse basis, the transaction may be treated as if it were a grant of an option, and thus there would be no transfer of property until the loan is paid.

Thanks for your help. 

Dr. William Henry Biggerstaff

Costa Mesa, CA  

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Hospital IRS Form 990 Tax Burden

Posted on April 14, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

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New Schedules – H and K – for Non-Profits

[By Dr. David Edward Marcinko; MBA, CMP™]dem21

As quarterly premium print-subscribers to Healthcare Organizations [Financial Management Strategies] know, the IRS redesigned Form 990 last year.

Form 990 Burden

The new Form 990 is controversial among not-for-profit hospitals (Schedule H) and tax-exempt bond issuers (Schedule K). Schedule H requires hospitals to provide new information on operations, including community benefit levels, charity care, aggregate bad debt expense, Medicare shortfall information and more.

Input Request

Now, the IRS is asking for healthcare sector input to promote uniform reporting, and make sure the form is simple enough for public use. So, through June 1 of this year, Uncle Sam is accepting comments on Form 990 draft instructions. And, the agency will post all comments on its website.

Hospital

FORM: IRS Form 990

Conclusion

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Physician Business Owners

Posted on February 24, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

Medical Accounting News for 2008

Staff Writers 

 

By now, most physician business-owners understand the general rules regarding the filing requirements for Form 1099-MISC. 

IRS Form 1099-MISC in Review 

Nevertheless, in review, Forms 1099-MISC should be issued to independent entities performing services for your medical practice or business entity. 1099s should be sent to individuals with annual earnings exceeding $600.  There is no requirement to file Forms 1099-MISC to corporations.  

The Forms should be mailed to the recipients no later than January 31st, and no later than February 28th 2008, to the IRS.  

Your Vendors 

The starting point in this process is your attempt to learn more about a vendor, subcontractor, janitor, accountant, attorney, software and medical practice management consultants, etc. 

This is accomplished by requesting the entity to complete a Form W-9, which will reveal the legal status of the vendor, i.e.  LLC taxed as a sole proprietor, an LLC taxed as a partnership, a corporation, a sole proprietor, etc. 

Assessment 

Always request and maintain a Form W-9.  Why? Protection from the IRS!  Failure to obtain and maintain Form W-9 can lead to the Federal backup withholding tax of 25% to 28%.  

Forms W-9 are available from the IRS Website. 

Conclusion: 

And so, are you familiar with these medical accounting risk management principles for Form 1099-MISC? 

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Reformed Accountants

Posted on December 12, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

Certified Public Accountants and EAs

Staff Writers           The healthcare industrial complex represents a large and diverse industry, and the livelihood of other synergistic financial professionals and consultants who advise doctors depend on it.  These include financial accounting professionals who themselves wish to avoid the collateral damage and negative ripple effects of the current healthcare reform debacle. 

Introduction 

The nation’s 330,000 or so CPAs and Enrolled Agents [EAs] know little about the new healthcare dynamics and managerial accounting mechanics. Many often feel as though they are laboring away in obscurity and that their doctor clients do not appreciate what they do or how hard they work. 

If you are an accountant, your work-week is ridiculously long, especially January through April; and you often deliver bad news to your clients. You do not earn a generous salary, but you do receive their ire for your efforts.  

The Pondering 

So, you begin to scratch your head and ponder, quietly at first, and then out loud.  Perhaps managing the medical practice(s) of a physician, or providing consulting services to other medical professional is a business and financial planning opportunity that won’t require a new client base? You can keep your accounting practice during the first four months of the year, and supplement your income with something that may actually earn more than you are making now.

However, terms such as capitated medicine; per-member & per-month fixed fees; payment withholds; activity based costing with CPT® codes; utilization and acuity rates; and much more investment and financial nomenclature is quite unfamiliar to you. 

Then you appreciate that MBAs and actuaries may actually be the new denizens of the healthcare bean counting and practice management scene. Rather than present numbers of the historic past, they make logical and mathematical inferences about the future.

The Realization 

Slowly, you realize more precisely that the accounting profession may be loosing its premier advisory position within the medical profession. 

In fact, your research suggests that as a result, there are now several accountant managers and broker-dealers on the investment scene, as well as an increasing number of accounting-financial planning firms.  

The Epiphany 

A light then goes off in your head, epiphany!  Enter the Certified Medical Planner™ professional designation. 

For more information: www.CertifiedMedicalPlanner.com

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Medical Economic Value-Added Accounting

Posted on November 29, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

Understanding MEVA?

www.HealthcareFinancials.comHOFMS

It is not unusual for a medial practice to incur extra-ordinary expenses by investing in technology or equipment. But, did you know that there are two methods of evaluating these capital expenses?  

·   The older Generally Accepted Accounting Principles (GAAP) removes them from the income statement that is used to evaluate enterprise profitability.

 ·  The newer Economic Value Added (EVA) approach treats them differently by considering both capital expenses and operational expenses when calculating profit.  

Introduction 

The concept of EVA was developed by New York City-based consultancy Stern Stewart. MEAV is a riff off this distinction applied to medical practice capital investments by distinguishing between illusory profits and real economic gain.  

The concept is useful to keep physician executives from disrupting the balance sheet by chasing profits. It may also better reflect enterprise value since to have a positive MEVA – practice revenues must exceed operating costs, taxes and a charge for the cost of capital (debt interest rate charges, or the risk of saving/conserving capital rather than spending/investing it).

In other words, the benefits of major equipment must be weighed against the financial drain of purchase. Additionally, taxes are also left out of a GAAP analysis of operating profit, but MEVA expensing includes them to keep operations as lean as possible.

Nevertheless, the MEVA formula may be expressed, as follows: MEVA = NOPAT – (Cost of Capital X Capital)orMEVA = (Operating Profit) – (A Capital Charge) where: NOPAT = (Taxable Income – Income Tax)where: Cost of Capital X Capital) = Depreciation X (Beginning Book Value).

As seen in the MEVA equations, there are two key components.  The net operating profit after tax (NOPAT) and the capital charge, which is the amount of capital times the cost of capital. 

NOPAT is the profit derived from operations after taxes, but before financing costs and non-cash bookkeeping entries. 

In other words, it is the total pool of profits available to provide cash return to the physician executives who provided capital to the practice.  The cost of capital is the minimum rate of return on capital required to compensate physician debt and equity owners for bearing risk – a cut-off rate to create value. 

On the other hand, capital is the amount of cash invested in the practice, net of depreciation.   

Criticism of MEVA Calculations 

It is important to note that the above only represents one of the many ways to define MEVA.  In reality, the definition of MEVA should be tailored to the specifics of the practice that uses it.

Also, in reality, there are adjustments that may change the way a practice defines MEVA. These equity equivalent (EE) adjustments are used to both NOPAT, and the capital employed, to reduce non-economic accounting and financing conventions on the income statement and balance sheet.  Equity equivalents (EEs) are adjustments that turn a practice’s accounting book value into an economic book value, which is more accurate measure of the cash that physician owners have put at risk and upon which they expect to accrue some returns.  

Equity equivalents turn capital-related items into more accurate measures of capital and include revenue-and expense-related items in NOPAT, thus better reflecting the practice’s base upon which owners expect to accrue their returns.

Furthermore, equity equivalents are designed to address the distortions suffered by traditional financial ratio measures, that change depending upon the generally accepted accounting principles adopted or the mix of financing employed. 

Moreover, the basic formula for MEVA tends to produces a more conservative picture of ROI, and medical practice profits or losses. 

Summary 

Therefore, MEVA should not be used too rigorously for fear of excessive risk aversion and the paralysis of analysis. Your experience with this concept is appreciated. 

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Practice Pro-Forma Accounting Statements

Posted on November 26, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

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What are Medical Practice Pro-Forma Financial Statements?

[By Staff Writers]

biz-book1Since a start-up medical practice has no historical financial information, simplified Pro Forma’s are estimated statements that are typically projected for 3 years.  They demonstrate the best care, worst case and most likely financial scenarios of a new practice, clinic, healthcare entity, etc. Computerized spreadsheets are ideal for this task.  Other relevant financial information may be included, as needed. 

 Net Income (Profit and Loss) Statement 

By allocating a practice’s profit or loss into operating groups, banks or investors can isolate profitable revenue centers and isolate unprofitable costs drivers. In certain managed care contracts, an analysis to identify unit or per dollar revenues, gross profits and/or gross margins, is vital.  Other non-cash expenses (i.e., depreciation, amortization and deferred taxes) are then deducted from revenues to determine overall net income. All is included in the income statement.  

Cash Flow Statement 

The Statement of Cash Flow (SCF) projects estimated cash flows by month, quarter and year, along with the anticipated timing of cash receipts and disbursements.  The office’s bills and obligations are paid out of cash flow, not net income.  It is very important for accrual based accounting practices; especially in terms of Medicare, Medicaid, MCOs, PPOs and HMOs producing insurance payment time delays and other aged accounting methodologies.  Cash flow reflects the internal generation of fund available to supply operating capital.  

 Balance Sheet 

The Balance Sheet (BS) forecasts the financial condition, assets and liabilities, of an office at a singular point in time.  It projects the ability to meet financial obligation and the capacity to absorb financial setbacks without becoming insolvent. 

Statement of Retained Earnings 

This is a fourth new financial statement, but it is not usually a pro-forma statement since little cash is generated from a new medical practice

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