IRS Provides Tax Relief to Victims of Severe Storms in Mississippi

The IRS has provided tax relief to victims of Mississippi state severe storms and tornadoes that occurred on March 24 and 25, 2023. Individuals and businesses in the disaster area now have until July 31, 2023, to file various tax returns and to make tax payments. Taxpayers who reside or have a business in the following counties qualify for this tax relief: Carroll, Humphreys, Monroe, and Sharkey. The relief postpones various tax filing and payment deadlines starting on March 24, 2023. Affected taxpayers have until July 31, 2023, to file returns and pay any taxes originally due April 18, 2023, plus other deadlines, listed on the IRS disaster relief webpage:

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What Makes a Medical Expense Deductible?

The IRS recently posted a list of FAQs concerning the treatment of certain costs related to nutrition, wellness, and overall health. Generally, to be deductible, medical care expenses must meet certain criteria, including that they must be incurred primarily to alleviate or prevent a physical or mental disability or illness. Included are the costs of diagnosis, cure, mitigation, treatment, or disease prevention, rendered by doctors, surgeons, dentists, and other medical practitioners. Also included are the costs of equipment, supplies, diagnostic devices, drugs, and medications prescribed by a doctor. Click here for the FAQs:

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Are You Leaving Money on the Table? How a Contract Audit Can Help You Find Savings in a Turbulent Market Environment

You put a lot of time and energy into vetting vendors and drafting contracts. Even if things are going well with the vendor, whether you have worked with them for six months or six years, a contract audit can help ensure that contractual obligations are fulfilled and you reap the full benefits of the arrangement.

Your company can prepare for a contract audit by determining which questions to ask and what factors to consider to ensure beneficial relationships with third parties. You should not leave any money on the table if you are contractually entitled to it — especially amid market volatility.


Questions to ask

Prior to commissioning a contract audit, you should ask yourself a few questions related to the vendors and suppliers you work with. Questions will vary according to your line of business and the nature of your arrangement with the third party, but the following queries can serve as guidelines:

  • Has there been an increase in what vendors charge you?
  • Are there clauses in your contracts that cover price escalation? If so, has there been a significant change in the way costs are calculated?
  • Do you have most favored nation (MFN) clauses built into your contracts? If so, has your company verified the validity of those or similar clauses to make sure you get what was agreed to?
  • Is your company missing out on cost savings by not monitoring contracts?


Factors to consider

An audit can ascertain whether third parties are honoring all terms of the contract. A common area of for audit review is whether the third party is adhering to the terms of a contract’s MFN clause, which dictates that the company will benefit from priority pricing and terms.

Cost savings are always a key area of consideration when assessing partnerships, but a recessionary economic climate adds greater urgency to companies’ decisions to conduct a contract audit. A contract audit can show that you’re being overcharged under the agreed-upon terms and therefore could recover previous overpayments and avoid them going forward.


Example: Analyzing Pass-Through Costs

A college admissions consulting firm relies on a boutique communications firm to handle their marketing initiatives. Though the contract states pass-through costs encompass postage and delivery services, the consulting firm wonders if the communications vendor has chosen more expensive delivery options than stipulated under the contract. An audit conducted by a contract specialist shows where certain pass-through costs do not meet the terms of the contract, which facilitates recovery and future savings.


In a contract, particularly a long-term contract, every penny counts. That is especially relevant amid a high-inflation environment affecting labor, materials, and utilities costs, as well as rising interest rates and other market headwinds. Annual pricing adjustments should be reviewed carefully, and some contracts may also include volume-based or index-based pricing terms. An index can change on a daily basis, so even a penny on the index can make a significant difference.


Example: Analyzing Annual Adjustments

A chain of regional clothing retailers has a long-term sales contract with a garment manufacturer. The contract includes a clause that states items’ base selling price can be adjusted on an annual basis, according to changes in machinery, materials, and labor costs. A contract audit helps the clothing retailer determine where annual price adjustments do not fully align with fluctuations to costs in the data sets outlined in the contract and recoup some of the increased costs.


Inflation and the rising cost of doing business can also change the dynamic of partnerships. Third parties might begin requesting your company cover the rising costs of materials, labor, transportation, and other areas not explicitly stated in the contract. A contract audit can determine whether the price you are paying is consistent with market rates.


Example: Adherence to Contract Terms

A chain of Southern-style restaurants supplement revenue by selling mugs, t-shirts and home décor that celebrate country living. The merchandise supplier has recently begun charging the restaurant chain a higher rate to cover rising freight costs. Feeling the pinch, the chain hires a professional advisory firm to perform a contract audit. The audit reveals that the existing contract does not permit the supplier to charge the restaurant chain a higher rate for shipping costs, even if these costs have risen for the supplier. The merchandise supplier agrees to pay back the restaurant chain the difference for the higher freight charge.


The benefits of using an experienced advisor

Hiring an advisory firm to review a contract is not an adversarial act. Instead, working with experienced professionals helps ensure the arrangement benefits all parties, and it can strengthen the relationship further. Audits that uncover discrepancies between agreed-upon terms and operations are a critical first step toward recovering funds and refining operations for additional value, whether that means seeking a vendor that is a better fit or moving forward with the same vendor in a more equitable manner.

Audits that reveal operations are cost-effective and in alignment with contractual terms also provide value. They can tell you what to prioritize as you embark on new contracts with future vendors or enter contract renewals and renegotiations with existing partners.

There may even be instances when you decide to accept the terms of your suppliers and vendors, even if audit findings show the terms are not in the agreed-upon contract. While a contract audit can be a catalyst for contract revision, it does not have to be. The benefit of a contract audit is the insight and foresight to make the best decision for your business.


Realizing the full value of your relationships

Contracts between companies and third-party vendors can be complex. Particularly when faced with economic uncertainty, it is crucial for companies to prioritize and pursue partnerships that serve their interests and support cost savings.


Interested in learning more about risk advisory? Click here for more.


Written  by Janet Smith and Rhonda Warren. Copyright © 2023 BDO USA, LLP. All rights reserved.



April 18th Tax Deadline

April 18th is the deadline to file your individual 2022 tax return and pay any tax due. If you can’t file on time, you can request a six-month extension to file. However, any tax owed is generally still due by April 18th to avoid interest and penalties. If you owe taxes and don’t seek an extension to file, the IRS encourages you to file and pay as soon as possible to limit interest and penalties.


Some taxpayers may automatically qualify for extra time to file and pay tax due without penalties. This includes military members serving in combat zones, certain disaster victims, and taxpayers living abroad. If you’re due a refund, there’s no penalty for filing late. Here’s more:


Do you have tax questions or need to file an extension? Contact one of our experts for help.

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Scams Taxpayers Should Be Aware of This Filing Season

Among the many scams taxpayers should be aware of this filing season is one involving Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. Some filers have been falsely encouraged to claim the credits based on employee (not self-employment) income.

These credits aren’t even available for 2022. In a similar scheme, taxpayers have invented household workers and filed Schedule H (Form 1040), Household Employment Taxes, claiming they paid their fictitious workers sick and family leave wages. The goal of both scams is to trigger a tax refund.

The IRS encourages anyone who has filed false information to amend their returns. Contact us for help.


Awarded money in a lawsuit or settlement? It’s only tax-free in certain circumstances.

You generally must pay federal tax on all income you receive but there are some exceptions when you can exclude it. For example, compensatory awards and judgments for “personal physical injuries or physical sickness” are free from federal income tax under the tax code. This includes amounts received in a lawsuit or a settlement and in a lump sum or in installments. But as taxpayers in two U.S. Tax Court cases learned, not all awards are tax-free. For example, punitive damages and awards for unlawful discrimination or harassment are taxable. And the tax code states that “emotional distress shall not be treated as a physical injury or physical sickness.” Here are the facts of the two cases.

Case #1: Payment was for personal injuries, not physical injuries A taxpayer received a settlement of more than $327,000 from his former employer in connection with a lawsuit. He and his spouse didn’t report any part of the settlement on their joint tax return for the year in question. The IRS determined the couple owed taxes and penalties of more than $119,000 as a result of not including the settlement payment in their gross income. Although the settlement agreement provided the payment was “for alleged personal injuries,” the Tax Court stated there was no evidence that it was paid on account of physical injuries or sickness. The court noted that the taxpayer’s complaint against the employer “alleged only violations of (state) labor and antidiscrimination laws, wrongful termination, breach of contract, and intentional infliction of emotional distress.” The taxpayer argued that he had a physical illness that caused his employer to terminate him. But he didn’t provide a “direct causal link” between the illness and the settlement payment. Therefore, the court ruled, the amount couldn’t be excluded from his gross income. (TC Memo 2022-90)

Case #2: Legal malpractice payment doesn’t qualify for exclusion This case began when the taxpayer was injured while at a hospital receiving medical treatment. She sued for negligence but lost her case. She then sued her attorneys for legal malpractice. She received $125,000 in a settlement of her lawsuit against the attorneys. The amount was not reported on her tax return for the year in question. The IRS audited the taxpayer’s return and determined that the $125,000 payment should have been included in gross income. The tax agency issued her a bill for more than $32,000 in taxes and penalties. The taxpayer argued that the payment was received “on account of personal physical injuries or physical sickness” because if it wasn’t for her former attorneys’ allegedly negligent representation, she “would have received damages from the hospital.” The IRS argued the amount was taxable because it was for legal malpractice and not for physical injuries. The U.S. Tax Court and the 9th Circuit Court of Appeals agreed with the IRS. (Blum, 3/23/22) Strict requirements As you can see, the requirements for tax-free income from a settlement are strict.

If you receive a court award or out-of-court settlement, contact us about the tax implications. © 2023