OUT WITH THE OLD AND IN WITH THE NEW

There is a saying in Texas that, “when the Legislature is in session no one is safe.” I think that statement may also apply to the 111th. U.S. Congress. With the flurry of tax legislation passed this year (some of it very late in the year) and the Democrats and Republicans engaged in guerilla warfare it looks like both the IRS and tax practitioners are going to be facing a very challenging tax season. For example, two bills in particular created some unfortunate consequences:

1. Affordable Health Care for America Act
2. Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 –better known as the 2010 Tax Relief Act.

Hidden deep in the 2,409-page Affordable Health Care for America Act was an onerous provision that will require businesses to significantly expand the number of 1099 tax forms they must file each year. Almost everyone agrees that this is bad legislation but congress has been unable to agree on a bill to repeal the provision.

The 2010 Tax Relief Act was passed so late in the year that the IRS is now saying that some final 2010 tax forms may not be available until as late as February.

Add to the two items mentioned above the IRS’s Unenrolled Tax Preparers initiative and the new Preparer Tax Identification Number (PTIN) registration regulations and I am sure that you will agree that 2011 is going to be interesting. I think what both tax practitioners and the IRS are facing in 2011 can be summed up in a quote from actress Mae West; “Hang on boys, it’s going to be a bumpy ride.”

HAPPY NEW YEAR

12 Common Nonprofit Financial Statement Disclosure Omissions

The holiday season is upon us and with it thoughts often turn to the local charity or nonprofit organization. When I think about nonprofit organizations I am reminded of the financial statement disclosure omissions I see in their financial statements. Following is list of the 12 common disclosure omissions in nonprofit organization financial statements:

1. Organization’s capitalization policy.
The failure to disclose the organization’s capitalization policy— basically, the minimum dollar amount for capitalizing and depreciating an asset—is a common financial statement omission. In addition, the financial statements should include the organization’s policy on implying time restrictions on gifts of long-lived assets.

2. Subsequent events review.
Sometimes nonprofit organizations fail to disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or were available to be issued. It doesn’t matter if there weren’t any subsequent events disclosed in the financial statements; the financials still need to disclose the information about the review.

3. Uncertain tax positions.
ASU 2009-06 provides guidance on uncertainty in income taxes for tax-exempt organizations. FASB ASC 740-10 requires certain disclosures of those positions that are often overlooked:
a. Policy for classifying interest and penalties recognized in the financial statements that are associated with its tax positions.
b. Total amount of interest and penalties recognized in the statement of activities and the statement of financial position.
c. Information about positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date,
d. The tax years that remain subject to examination by major tax jurisdictions.

4. Long-term promises to give.
If a nonprofit organization has long-term promises to give that are measured at present value, then the resulting discount should be disclosed either on the face of the statement of financial position or in the notes to the financial statements. A related disclosure that is often missed is the amounts of promises receivable in less than one year, in one to five years, and in more than five years.

5. Interest paid.
FASB ASC 230-10-50-2 requires the financial statements to disclose interest paid (net of amounts capitalized). This disclosure is often omitted.

6. Summarized financial information.
Summarized prior period financial information does not always include all the detail required by GAAP. FASB ASC 958-205-45-8 and FASB ASC 958-205-50-4 require the financial statement titles to indicate that the prior year information is summarized and to see the financial statement notes that describe the nature of the summarized financial information.

7. Contributed services not properly disclosed.
FASB ASC 958-605-50-1 requires the disclosure of the following items that are sometimes omitted:
a. The activities or programs for which contributed services were used.
b. The nature and extend of those services.
c. The amount recognized as revenue during the period.
d. If practical, the fair value of contributed services received but not recognized in the financial statements.

8. Fund raising expenses.
Any nonprofit organization that has fund raising expenses is required to disclose the following items that are often over looked:

a. Total cost of all fund-raising activities.
b. The method used to compute the ratio of fund-raising expenses to funds raised, if such ratios is disclosed in the organization’s financial statements.

9. Concentrations of risk.
FASB ASC 275-10-50 includes the disclosure requirements related to risks and uncertainties. One that is often overlooked is the requirement to consider whether to disclose concentrations in the market or geographic area in which the nonprofit organization operates.

10. Endowment funds.
All nonprofit organizations that have endowment funds are subject to the disclosure requirements of FASB ASC 958-205-50-1B. The disclosures include organization policies related to endowments, a reconciliation of beginning and ending balances, and information about deficiencies in individual endowments. These are often missed.

11. Trade receivables.
For nonprofit organizations that have trade receivables, FASB ASC 310-10-50-2 through 50-8 includes disclosures related to these receivables. (They do not apply to promises to give.) These disclosures are sometimes overlooked when preparing year-end statements.

12. Restrictions on net assets.
Nonprofit organizations must disclose the total of temporarily and permanently restricted net assets either on the face of the statement of financial position or in the notes to the financial statements. Where the disclosures can sometimes fall short is FASB ASC 958-210-50-3’s requirement to also disclose information about the amount and types of the different restrictions.

In order to prepare nonprofit financial statements in accordance with GAAP and not inadvertently leave out a required disclosure, consider using a disclosure checklist such as the one included in PPC’s Guide to Preparing Nonprofit Financial Statements.

Blue Light Special

Blue Light Special

When you think of: Faster than a speeding bullet, do you think of Clark Kent, aka Superman? Well, if so, you are not keeping up with tax law. The Internal Revenue Code is now faster than a speeding bullet. I am not referring to the fact that tax law changes more quickly than fashion styles. I am referring to the fact that some new tax laws are only effective for less than 100 days.

Seriously!

Code Section 1202, which has been around since 1993, provides for an exclusion of a portion of the gain from the sale of C corporation stock, meeting specific requirements, held for more than 5 years. The exclusion rate, prior to the most recent legislative change, was either 50% or 75%. Under the Small Business Jobs Act of 2010, the exclusion is 100%. Now, that is a full exclusion. In other words, the gain on the sale of the stock is completely and totally tax free. This is a wonderful benefit and all practitioners should be sure to fully review the statute in full.

However!

But, the statute is effective only for stock acquired after September 27, 2010 and before January 1, 2011. That means September 28-30, all of October, all of November, and all of December 2010 but not a day later. That is less than 100 days! The time is short.

I find it remarkable that Congress can pass a law which virtually expires before the general public knows about it. I attribute this law to the new world of social media. It used to be we obtained our news by reading a printed newspaper, a fine magazine, or a book. Now the news comes to us via Facebook, MySpace, and Twitter. And Congress knows it.

Is the day too far off when tax law will change this way? You'll look at your iphone and read the following tweet: For the next 15 hours, if you buy a new ipad, you can take 120% depreciation. But, remember, this offer is only good for the next 15 hours. 16 hours, and you are toast. Act now!

Internal Revenue Code meet the Kmart Blue Light Special!

SSARS NO. 19 IMPLEMENTATION DATE IMMINENT

The Accounting and Review Services Committee approved SSARS 19, Compilation and Review Engagements, on December 30, 2009. This standard becomes effective in 35 days; are you ready?

SSARS No. 19 is effective for compilations and reviews of financial statements for periods ending on or after December 15, 2010—that is, for 2010 calendar year-ends and later. Following is how the statement will affect your compilation and review engagements.

What SSARS No. 19 Does

Some of the more significant provisions of SSARS No. 19 include the following:

• Allows, but does not require, accountants to explain why they’re not independent in a compilation report.
• Separates the compilation requirements from the review requirements.
• Introduces the term review evidence into the review literature. Review evidence is defined as information the accountant uses to provide a reasonable basis for obtaining limited assurance.
• Provides guidance on how the accountant obtains limited assurance when performing review procedures.
• Requires tailoring review procedures for a particular engagement based on the accountant’s knowledge of the client, understanding of the client’s industry, and awareness of the risk that the accountant may knowingly fail to modify his or her report on materially misstated financial statements.
• Discuses the concept of materiality in the context of review engagements.
• Requires a written communication, (i.e. an engagement letter) documenting the understanding with the client regarding the services to be performed.

Documentation Requirements

In addition to the engagement letter, SSARS No. 19 requires the accountant to document the following items:

• Significant, unusual matters considered by the accountant during the performance of the compilation procedures, including their resolution.
• Analytical procedures performed, for review engagements, including management’s response to the accountant’s inquiries regarding fluctuations or relationships that are inconsistent with other information or that differ from expectations by a significant amount; additional review procedures performed and the results of those procedures; significant matters covered in the accountant’s inquiry procedures; significant findings or issues or unusual matters and their disposition; and the client representation letter.
• Communications regarding fraud or illegal acts that came to the accountant’s attention while performing the compilation or review engagement.

Reporting Changes

SSARS No.19 changes the language in standard compilation and review reports and provides illustrations of both types of reports. As previously noted, an accountant may now choose to include language in the accountant’s compilation report describing the reason the accountant is not independent. This disclosure would be added to the final paragraph of the report. There is no prescribed language the accountant must use in the report. Although accountants aren’t required to include the reason(s) for independence impairment, if disclosure is made, it must include all reasons independence is impaired.

Be sure that you and your staff are familiar with the new requirements of SSARS No.19 so you will be ready when the standard is effective.

MAJOR LEAGE BASEBALL—MAJOR LEAGUE BUSINESS

Did you watch the World Series? Well, neither did a lot of other people since the games garnered the smallest TV audience in World Series history. My team didn’t win but it was great fun to watch. The Giants hadn’t won the World Series since the 1950’s and the Rangers had never even been to a World Series where they didn’t have to buy a ticket to get in.

As I watched the games, I thought a professional sports franchise must be an incredible business. One unlike any business most of us have ever been associated with. I know of no other business in the world where the average annual salary of its employees was over $3 million each in 2008. And that is up from an average of $1.1 million in 1995. The New York Yankees total player payroll for 2009 was a little over $210 million for a 40 man roster. And how about the fact that even if a player only bats .190, he will still be very well paid on pay-day.

Major league team owners complain that they lose money every year. I know you’re probably saying to yourself; “But what about all those TV and merchandise revenues?” In 2009 some $660 million (according to ESPN) was sent to the 30 clubs for TV rights. In addition the clubs participate in a revenue sharing program ($433million in 2009) that redistributes revenue from high earning clubs, like the New York Yankees, and gives it to clubs in need of assistance. Revenue from merchandise and licensing only accounts for a small part of a team’s revenues. The majority of a team’s income comes from league-wide revenue sharing, TV fees, ticket sales, and stadium revenues. To me it looks like you can’t lose, so why are they complaining?

For major league sports franchises, cash is definitely King, especially around payday. So, if your team is in need of cash where do you turn? To the guys with all the money; your employees. You may be able to talk some of the more highly paid players into deferring part of their salary to the end of their contract. If that doesn’t work, you can always trade your high-paid players to another team. These players are also usually your best players, so this option assures you a losing season next year.

So let’s summarize some of the unique aspects of the business of a major league baseball franchise:

1. Each of your employees, on average, makes more than $3 million a year.
2. Your employees don’t have to perform, but they will continue to receive their pay.
3. You share revenue from TV fees and merchandise sales with your competition.
4. If you don’t earn the highest revenues, don’t worry, your competitors will give you part of theirs.
5. If you make more money than your competitors, you have to give them part of yours.
6. The best place to borrow money is from your employees.

I think it’s a very unusual business, but still it’s a great game. What do you think?

WEBINARS

Webinars are rapidly becoming one of the most popular types of CPE. However, some people may be confused about the difference between a webinar, a webcast, and a web conference. The confusion stems from the fact that the terms are often used interchangeably, but, while they are similar, each has its own unique attributes.

Defining the Terms

The term webinar is short for Web-based seminar. A webinar can be a presentation, lecture, workshop or seminar that is transmitted over the Internet. According to Wikipedia, “it is typically a one-way communication from the speaker to the participants with limited audience interaction. A webinar can be collaborative, however, and include polling questions, and questions and answer sessions to allow full participation between the audience and the presenter.” The presenter usually speaks over a standard telephone line while describing information being presented onscreen. The audience can respond over their own telephones or by using the Internet.

A webcast, according to Wikipedia, “is a media file distributed over the Internet using streaming media technology to distribute a single content source to many simultaneous listeners or viewers. A webcast may be distributed live or on-demand. Essentially, webcasting is ‘broadcasting’ over the Internet. The term webcasting usually refers to non-interactive linear streams of events.”

A web conference is used to conduct live meetings, training, or presentations via the Internet. In a web conference, each participant sits at their own computer and is connected to other participants via the Internet. With a web conference the presenter controls what participants see on their computer monitors by sharing their desktop. The presenter can also pass control of the screen to another attendee during the presentation without giving up control of the presentation.

Comparing the Differences

Webinars vs. Webcasts – One big differences between webinars and webcasts is that webinars are always live presentations; webcasts can be delivered live or on demand. Another difference is that, webinars are interactive; whereas web casts are non-interactive.

Webinars vs. Web Conferences – The difference between webinars and web conferences is that webinars allow only limited audience participation; whereas web conferences allow substantial audience participation.

Conclusion

Webinars are rapidly becoming the learning delivery method of choice because they are economical, easy to produce, and convenient for the participant. You can attend a webinar at home in your pajamas or at the office on your lunch hour. There is no travel, meal, or hotel expenses associated with a webinar. You don’t have to leave home to participate and best of all you don’t have to take an exam in order to receive CPE credit for the presentation. With a webinar you can easily build learning and CPE into your busy schedule; all you need is a high-speed Internet connection and a telephone.

If you are interested in learning more about webinars and the topics that are currently available, check out the Webinar Learning Network on Checkpoint Learning at: https://checkpointlearning.thomsonreuters.com/CPEBrands/WebinarLearningNetwork

PTIN BEGINS & COMPETENCY IS COMING

Earlier this year the IRS announced their new tax preparer initiative (see my blog “Sign Me Up Boys” of May 6) that will require all paid tax preparers to obtain a Preparer Tax Identification Number (PTIN). Unenrolled tax preparers will also be required to pass a competency exam and take mandatory continuing professional education courses.

On September 28, the IRS launched the PTIN registration system component of its tax payer initiative program and provided further clarification of the unenrolled tax payer program. Here are some of the more significant items you should know.

New PTIN Requirements

1. All compensated tax return preparers or those assisting in preparing the return must obtain a PTIN.
2. All federal tax return preparers–even those who already have a PTIN–will need to register in the new system by December 31, 2010.
3. At least initially, non-signing preparers will not have to be disclosed on each return.
4. An employee of a business who prepares the business tax return as part of their job responsibilities will not be required to sign the return as a paid preparer or register and obtain a PTIN.
5. All paid tax return preparers are required to obtain a PTIN. This includes those who only prepare payroll or other non-1040 tax returns.
6. You must be at least 18 years of age to obtain a PTIN.
7. Individuals who prepare tax returns as a VITA volunteer are not required to have a PTIN.

Competency Testing

1. Those who pass the competency test will be called “registered tax return preparers.”
2. The test will only be available in English, initially.
3. The test will be open book. Certain resources will be permitted and provided by the testing center.
4. The passing percentage for the test still hasn’t been determined. You may take the test an unlimited number of times, but the fee will apply each time you take the course.
5. If you don’t pass the test by December 31, 2013, your PTIN will be deactivated and you can no longer prepare tax returns for compensation.
6. Testing is expected to begin by midyear 2011.
7. To take the test, you must physically go to the testing site.

Other Credentials

1. Accredited Council of Accountancy for Taxation (ACAT) credential holders must obtain a PTIN and pass the competency exam unless they are a CPA, attorney or enrolled agent.
2. Registered or Licensed Public Accountants (LPAs) that have the same rights and privileges as a certified public accountant will not be required to pass the competency exam or satisfy the CPE requirements. However, if they do not have the same rights and privileges as a certified public accountant, they will be required to pass the competency exam and satisfy the CPE requirements. (Check with your state regulator.)

For information on training to prepare you to pass the unenrolled tax preparers exam, go to the following website:

http://www.gearup.com/cart/BrowseByTopic.aspx?Code=10-s250

Is creating this fourth class of individuals who are approved to prepare federal tax returns good for taxpayers or the accounting profession? What do you think?

A BLUE-RIBBON PANEL

Toward the end of 2009 the Financial Accounting Foundation (FAF) in cooperation with the AICPA and the National Association of State Boards of Accountancy formed a blue-ribbon panel to address how accounting standards in the United States can best meet the needs of users of private company financial statements. The formation of this panel represents the latest in a series of developments related to the “big GAAP/little GAAP” debate. (See my blog of May 14th.)

There are over 22 million private companies in the U.S. but there are only about 17,000 publicly traded companies so it would appear that addressing the accounting and financial reporting needs of this very large group should certainly be a priority of the FAF. Rick Anderson, chairman and CEO of Moss Adams LLP and a member of the FAF Board of Trustees, was appointed chairman of the panel. The panel is expected to provide recommendations on the future of accounting standard-setting for private companies, including whether there is a need for separate, stand-alone accounting standards for those companies.

The panel evaluated five possible approaches. They rejected two of the five approaches and then expanded their evaluation of the remaining three. The panel rejected the current approach to setting generally accepted accounting principles related to private companies. They do not believe that the current method is meeting user needs in a cost-effective manner. They also rejected adoption of the current International Financial Reporting Standards for Small and Medium sized Entities, IFRS for SMEs.

The three remaining models that the panel is evaluating are as follows:

1. U.S. GAAP with exclusions and enhancements for private companies.
2. Basic U.S. GAAP with public company add-ons, and
3. Separate, stand-alone standards for private companies based on current U.S. GAAP.

The panel is also exploring whether to recommend a board separate from the FASB to oversee private company standards. Barry Melancon, CEO of the AICPA, and one of the panel members, believes that they should.

Before making its final recommendations the panel sought input from the public about how accounting standards can best meet the needs of users of private company financial statements. The comment period just ended on September 15, 2010. The panel is expected to make its final recommendations by the end of the year.

The issue of big GAAP vs. little GAAP has been debated for decades. So, the likelihood that the recommendations of the panel will be adopted in the near term is probably very small. However this is an issue that I believe needs to be addressed. What do you think?

Plain Speaking and Tax Law

NOTE: This blog was written by Abe Carnow.

As you know, President Obama on September 27 signed the Small Business tax law, H.R. 5297. Right on the heels of his signature, the following news item appeared on BNA Daily Tax Real Time, on September 28, in the afternoon.

Senate Passes Amended Version of ‘Plain Writing’ Bill Affecting IRS Rules

The Senate passed legislation by unanimous consent late on September 27th that would require government agencies such as the Internal Revenue Service to draft all public documents in “plain writing.” The Plain Writing Act of 2010 (H.R. 946) would require IRS to provide tax forms in plain writing and would require federal agencies to draft documents explaining how to comply with federal guidelines in plain writing. House lawmakers passed the bill by a vote of 386-33 on March 17th and will need to vote again to send the amended bill to the president. The text of the bill is:

In the Senate of the United States, September 27, 2010.

Resolved, That the bill from the House of Representatives (H.R. 946) entitled ‘‘An Act to enhance citizen access to Government information and services by establishing that Government documents issued to the public must be written clearly, and for other purposes.’’, do pass with the following:

AMENDMENTS:

1. On page 2, line 17, strike relevant to and insert necessary for

3. On page 3, strike lines 5 through 9 and insert the following:

PLAIN WRITING—The term ‘‘plain writing’’ means writing that is clear, concise, well-organized, and follows other best practices appropriate to the subject or field and intended audience.

This idea is a fine one. But, I have a suggestion for Congress.

How about writing the tax law using plain writing, meaning writing that is clear, concise, well-organized, and follows other best practices appropriate to the subject or field and intended audience? What do you think?

ARE YOU ETHICAL?

It seems to me that every time I watch a television news program or pick up a newspaper the top story is about fraud, embezzlement or unethical behavior. I think that Henson Cargill really captured the essence of much of today’s ethics in a song titled “Skip a Rope.” The song goes, “Cheat on your taxes, don’t be a fool. Now what was that they said about a golden rule? Never mind the rules just play to win…” Cheating on your taxes, like the song says, is what everyone else does so why shouldn’t you? Whether it is pro sports or business, today’s philosophy is play to win even if you have to break the rules.

Tax fraud by unenrolled tax preparers has become so common place that the IRS is proposing a mandatory competency examination for anyone who prepares a tax return for a fee (CPAs, Attorneys and Enrolled Agents are exempted). The Unenrolled Tax Preparers initiative will also require each person to complete two hours of ethics training once they have passed the competency exam. Will that make them more ethical? I doubt it.

The Texas State Board of Public Accountancy requires me to take a four-hour ethics course every other year. My employer requires me to periodically read and sign a Code of Business Conduct and Ethics. Will those two activities make me more ethical, probably not? The reason is that I developed most of my understanding of right or wrong when I was growing up, as does everyone. But they do serve as good reminders of those moral and ethical values that I learned as a child.

I was recently involved in an investigation to determine if someone had cheated on a course final examination. Upon review, it appeared that, in fact, they had cheated on the exam. You guessed it. The topic of the course was professional ethics.

In business, employees tend to adopt the ethics of management. This is referred to as the “tone at the top” in the audit literature. Unethical behavior by management tends to filter down to the employees of the organization. Employees will assume that if it is okay for management to be unethical, then it is okay for them to act in the same way.

Are we more unethical today than our forefathers were 50 years ago? I am not sure. Maybe unethical behavior is just more visible today than in the past. So why does it seem that ethical behavior has deteriorated to the point where it is almost common place? I am not sure, but if you aren’t practicing ethical behavior each and every day you need to try to correct the problem and do better in the future. What do you think–are you ethical?

SHIP AHOY

Have you ever wondered what is involved in accounting for the operations of a cruise ship? Well I hadn’t either until I recently took a cruise around the Hawaiian Islands. You should have seen the look on the Cruise Director’s face when I ask to speak to the ships chief accountant. He said that was the most unusual request he had ever received. He was use to requests for tours of the bridge, the engine room or to speak to the captain, but never to speak to the ships accountant.

There are usually two accounting departments on a cruise ship; one that handles passenger accounting and the other that handles the general accounting duties for the ship and its employees.

I only got a very general overview of the ships accounting department, which for the most part was not the more interesting of the two departments. Some of the challenges they face include a work force from various states and foreign countries. This particular cruise ship had approximately 950 employees. Payroll is twice a month and employees room and board is provided by the ship. Employees work five months on, two months off, and then another five month rotation. One of the employees said it was really a great job since all of your expenses are paid and you are working almost every day for the five months so you never have time to spend your pay check. Sounds like a great job for a single person.

I was given access to the Assistant Financial Accountant who was in charge of passenger accounting for the ship. His name was Sergey. Sergey was a delightful young man from Russia who gave me the cook’s tour of the duties and responsibilities of his department. Passenger accounting had eight employees, including Sergey, that handle the accounting for some three thousand passengers. Sergey and his employees speak a total of eight different foreign languages in order to accommodate the international mix of passengers. The passenger accounting employees handle all passenger related accounting transactions from boarding to final disembarkation. Before boarding the ship you are required to establish an on board account and either provide a credit card or a cash deposit to cover any charges you might have while on board the ship. You are then issued a cardkey which give you access to your state room and also serve as a credit card for any purchases you make while on the ship. All purchases must be made using your cardkey. Cash is not accepted on board the ship. Sounds like a very good internal control.

Sergey’s group handles passenger registration including issuing your cardkey. His group is also responsible for checking every cardkey charge of every passenger to be sure that the charge amount is correct and that the passenger has not been over or under charged. Then at midnight each night all of the day’s credit card charges are uploaded. Any charges that are rejected for any reason have to be resolved by Sergey’s group. For charges that are rejected by the credit card company you will have to either provide a new credit card or a cash deposit before you may make any further purchases onboard. For deficient cash deposit accounts, an additional cash deposit or valid credit card will be required.

The ship is also required to collect state sales tax when in US waters. For example there is a Hawaiian sales tax and an Oahu Island sales tax that has to be collected when in Hawaiian waters within three miles of the island of Oahu. However, the ship is not required to collect state sales tax when it is in international waters. The moment the ship sails into International waters the bridge notifies the accounting department and sales tax collection is stopped. The passenger accounting department immediately turns off the calculation of sales taxes by the ships cash registers. When the ship crosses back into US waters the sales tax function is again activated.

At the end of the cruise the accounting department is responsible for settling up with each passenger. For passengers who have set up a credit card to cover their on board expenses they simply need to verify that all of the charges are correct. For passengers that have put up a cash deposit they will need to collect the balance of their deposit. Also, where a passenger has made a deposit in US dollars but is returning to a foreign country they try to refund the balance in the currency of the country to which the passenger is returning after the cruise. All balances must be refunded no matter how small the amount. Sergey said that once he had to track down a passenger that was owed a total of one cent. Oh yes, they won’t allow you to leave the ship at disembarkation until you have settled your account. Aloha.

The ULTIMATE 1099?

Robert Preston, playing the lead in The Music Man, sings, “You've got trouble, my friends!” and accountants do have trouble, and not just in River City.

Beginning January 01, 2012, 1099s must be issued for virtually all payments made by a trade or business aggregating $600 or more to any single vendor. Here is Code Section 6041(a) and 6041(h). Reading the statute is important.

6041(a) Payments of $600 or more.
All persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, amounts in consideration for property, premiums, annuities, compensations, remunerations, emoluments, or other gross proceeds, fixed or determinable gains, profits, and income (other than payments to which section 6042(a)(1) , 6044(a)(1) , 6047(e) , 6049(a) , or 6050N(a) applies, and other than payments with respect to which a statement is required under the authority of section 6042(a)(2) , 6044(a)(2) , or 6045 ), of $600 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for, shall render a true and accurate return to the Secretary, under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary, setting forth the amount of such gross proceeds, gains, profits, and income, and the name and address of the recipient of such payment.

6041 (h) Application to corporations.
Notwithstanding any regulation prescribed by the Secretary before the date of the enactment of this subsection , for purposes of this section the term "person" includes any corporation that is not an organization exempt from tax under section 501(a).

In the fall seminars, Gear Up will discuss this significant change and how to cope with it. But, wait, there's more in the proposal chain. The President's Economic Recovery Advisory Board, Paul A. Volcker, Chairman, on page 60, Small Business Bank Account Reporting, proposes a simplified tax accounting system for small businesses that permits cash accounting. But the cost of that proposal is that “a small business would be required to use a designated bank account for all business receipts and expenditures that is segregated from any personal bank account. The bank would be required to report the receipts and expenditures within the designated account annually.”

Call it the lifetime 1099.

Robert Preston worried about bringing in a billiards parlor. Ah, those halcyon days of yore!

Judge Not and Persistence

As a tax guy, I work many controversy cases. Before I take on a case, I need to evaluate the case and determine if I feel there is a possible resolution that I can work with the IRS to effect.

Recently, I was approached by a CPA who wanted help on a penalty abatement for a non profit who was delinquent with their 990 filing. This is a 990 organization with larger gross receipts and the delinquency covered a span of years. Some penalties can be abated if reasonable cause is demonstrated. In fact, in the Gear Up Class, IRS Audits, Appeals, and Collections: Successful Strategies, Rick and I teach about penalty abatement. I have historically had good success but not 100% success (who has?). I evaluated the 990 case and I felt there was an argument for reasonable cause but I was not overly optimistic about getting the penalty abated. I typically take on cases that I feel very positive about and not only do I practice positive affirmation of the good results, but I usually have quite a fighting spirit going in. In this case, I was not overly optimistic and, while I fashioned a very well argued letter, covering the issue, facts, rule of law, argument, and conclusion, I still did not expect exceptional results.

And herein lays the surprise. Close to $83,000 of penalty abatement was accomplished. And this was an appeal of a previously rejected penalty abatement.

There are two lessons to be learned. The first, and most obvious lesson, is: If at first you don't succeed, try, try again. Learn about the appeals process. Do not be afraid to take the case up to the next level. Use your tax knowledge to make a strong case, as the facts warrant. Sometimes you make an initial fantastic presentation, but it doesn't move the IRS. Make the same presentation to someone different in the IRS, and the results could be sensational. Now, when you make the second presentation, you have the advantage of having gone through a dress rehearsal, which means the second presentation is improved. Also, you prepare further for the appeals hearing. So, it is not solely a case of persistence, but persistence, along with applied skills is a winning combination.

And, the second lesson is, you never know what the results will be. The enjoyment of resolving controversy cases with the IRS is that you never really know how the case is going to end. Even though we assess the case, we never know the ending. With this case, I was not overly optimistic. I do believe the abatement is warranted and I do believe the protest was soundly structured, and I did hope for, but did not expect the best. And the best came our way.

With the IRS you just never know. Do your best. Persist. Be of good cheer. Persist. And, oh yes, persist.

HOW DO YOU LEARN?

How do I learn? That is a question we should ask ourselves because knowing how we learn will enable us to select training methods that provide us with the best possible learning outcome. People learn in different ways. No one has a better learning style than anyone else. Remember, the way you learn is perfect for you. I am just thankful that what I don’t know I can learn.

It has been said that what we learn, after we know it all, is all that really counts. Researchers tell us that there are as many as seven different learning styles; but most just narrow it down to three basic types of learning:

Listening - someone tells you how to do something.

Seeing - you watch someone perform the task.

Doing - you perform the task yourself.

Most people combine one or more of these learning styles to suit their personal preferences. I have found that I learn best when I can both see and hear the instructor as he or she demonstrates a concept. I do OK with just listening, but just watching something demonstrated or reading about how to do it has never really worked for me.

It is important to know which method of learning is best for you because as a CPA, accountant or tax professional what we sell is our knowledge. The number of accounting and tax rules, regulations, policies and procedures are growing at a rapid pace; therefore, it is imperative that we make learning a continuous life-time activity if we intend to stay abreast of these ever- changing rules and standards. If you are looking for a training provider that can meet all of your training needs and provide outstanding quality courses in all of the different learning styles, then look no further than the Tax & Accounting Business of Thomson Reuters. Check them out and see for yourself at:

https://checkpointlearning.thomsonreuters.com/ .

Knowledge has certainly increased within this generation almost beyond imagination. In fact according to some research studies, “the total of all human knowledge is now doubling every eight years." I think that continuous learning is, and will continue to be the key to success no matter your profession. What do you think?

IRS Will Tan Your Hide

When I was a young boy my dad would occasionally threaten to “tan my hide,” meaning that I was about to get a spanking. Well, it looks like Congress and the IRS are now passing out spankings of a financial nature to anyone who uses the services of an indoor tanning salon. The Patient Protection and Affordable Care Act levies a 10 percent excise tax on indoor tanning services. The act was effective July 1, 2010, and requires all indoor tanning salons to charge their customers a 10% excise tax for the use of a tanning bed. The tanning customers may not be the only ones getting their hide tanned because if the customer fails to pay the tax, the tanning salon is liable for it.

There are exemptions from the tax, though, for phototherapy services performed on premises by licensed medical professionals, spray-on tanning services, and certain physical fitness facilities that offer tanning as part of their services without a separate fee. Looks like the fitness club industry has a pretty good lobby, wouldn’t you say?

Tanning salons are required to file the newly revised Form 720, Quarterly Federal Excise Tax Return. Have you seen this thing? If you count the Payment Voucher it is 7 pages long!

Indoor tanning services tax is reported in Part II on page 2 along with the excise tax on bows, quivers, broadheads, fishing tackle boxes, electric outboard motors, fishing poles, and arrow shafts. If tanning beds are so dangerous to your health, maybe it should be reported over on page 1 of Form 720 along with diesel fuel. What do you think?

Circular 230 Rides Again

This week the IRS proposed amendments to Circular 230 to help regulate tax return preparers by making all return preparers subject to the circular’s requirements. The proposed amendments would do the following:

· Define “Practice before the Internal Revenue Service” to clarify that either preparing a document or filing a document may constitute practice before the IRS.
· Establish a new “Registered Tax Return Preparer” designation. (They will probably become RTRP’s don’t you think?)
· Define eligibility to become a Registered Tax Return Preparer. (The regulation of unregistered tax preparers currently being proposed by the IRS.)
· Amend the rules regarding continuing education providers.
· Establish standards for the preparation of tax returns.
· Make RTRPs subject to the solicitation, incompetence and disreputable conduct sections of the circular.

The service also announced that they will stop issuing PTINs effective August 22nd. If you apply for a PTIN before August 22nd. you will have to reapply once the new comprehensive PTIN system is in place. Won’t everyone have to reapply?

The AICPA says that it supports the general goals of improving compliance and raising ethical conduct but has serious concerns with a number of implementation steps (See Journal of Accountancy, “IRS Moves Forward With Preparer Registration Plan,” August 19, 2010). Is requiring compliance with Circular 230 a good plan that will improve tax compliance and ethical standards or is it just more government red tape? What do you think?

THE IRS DOESN’T WANT YOUR TAX RETURN

At least not if it’s a Form 706 Estate Tax return because they don’t know what to do with them and don’t have a place to store them. Congress can’t seem to get its act together to address a fix for this dilemma and so the estate tax will probably remain in limbo at least for the rest this year.

For some tax payers, this is an unbelievable windfall. Take George M. Steinbrenner for example, the late owner of the New York Yankees. George passed away in July 2010. At the time of his death, his net worth was estimated at somewhere around $1.15 billion. And guess what, if the current estate tax regulations are not changed, George’s heirs will owe exactly zero taxes on his estate. Oh to be so lucky. Not George of course, but his heirs. The current estate tax provisions were part of the Economic Growth and Tax Relief Reconciliation Act of 2001 and will end on December 31, 2010. Next year the tax rate will return to a graduated rate with a maximum of 55 percent.

The old saying, “You can’t take it with you,” is still true, but with the current estate tax rules you can sure leave a lot more behind for your friends and relatives. What do you think?

DO YOU KNOW ALL THE TAXES YOU PAY?

I am betting that you don’t have a clue. The reason that I don’t think you really know what taxes you pay is because so many of them are hidden. Take for instance the employer’s portion of your payroll taxes that help fund Social Security and Medicare. These taxes are usually not shown on your pay stub, but they are ultimately passed on to you in the form of lower wages.

It is estimated that some 37% of federal taxes are hidden. A study by the Institute of Policy Innovations suggests that hidden taxes amount to $2,462 per person annually. So what are some of these hidden taxes?

Take gasoline for instance. Approximately fifty cents of the price you pay per gallon goes to pay state and federal taxes. Then there are the sin taxes on alcohol and tobacco. How about the travel taxes on air fares, taxis, car rentals and hotel occupancy? In addition to these that are sometimes actually labeled as taxes there are others that are cleverly disguised as “fees.”?

Just take a look at your cell phone bill. I did and here is what I found. In addition to the state telecom tax, the city telecom tax and the state sales tax, there was the Regulatory Cost Recovery Charge, the Federal Universal Service Charge (whatever that is), the Franchise Tax Recovery Fee and the 911 Service Fee. Thirteen percent of my bill each month is not for the cost of making calls but rather for taxes.

Politicians know that if they raise income or property taxes we will notice and complain. So what do they do? They have businesses add these “taxes” to their products and services and call them fees.

I think that the government is better at picking our pockets than any professional pickpocket. What do you think?

More To The Story Than Meets The Eye

Pendergraft v. U.S. was decided on July 22, 2010. PPC's description of the case is: Mortgage Refinance Proceeds: Taxpayers filed an amended return based in part on their claim that the IRS incorrectly characterized a $35,103 bank deposit from a mortgage refinance as taxable income. The IRS denied the claim because: "You did not document that your share of the loan proceeds were deposited into the accounts considered in determining gross receipts. Rather it appears that your share of the loan proceeds were deposited into one of the accounts not provided to the examining agent which she requested." After noting that funds received from a mortgage refinance are not taxable, the Court of Federal Claims concluded that taxpayers produced sufficient evidence (a letter from Kanaly Trust Company) establishing that they received a check for $35,103 representing one-half of the mortgage refinancing proceeds. Pendergraft v. U.S. , 106 AFTR 2d 2010-XXXX (Ct. Fed. Claims).

I thought this would be an interesting case to read in full. How could the IRS argue that loan proceeds are taxable income? Is this a matter of an IRS correspondence case where the IRS agent added up all bank deposits and the taxpayer explained the additional deposit amount was due to a refinance and the IRS did not understand the explanation? Is this a case where the IRS is ignorant? Is this a case where the IRS tries to extract money from the taxpayer? Or is there more to the story?

There IS more to the story. The case states: The Government highlights the fact that since 1997 Plaintiffs have “created a series of illegal trusts that they believed would enable them to avoid all income taxes.” Gov't Opp. & Cross Mot. at 5. This is not the first time the IRS has had to re-examine Plaintiffs' tax returns. Id. In fact, Plaintiffs filed Form 1040EZ returns between 1998 and 2001 reporting zero taxable income, even though they had received substantial income. Id.; see also NHUSS Trust v. Comm'r, 90 T.C.M. (CCH) 374 [TC Memo 2005-236] (2005) (holding Plaintiffs in the case at bar liable for negligence penalties that arose as a result of the underpayment of taxes in 1999 and 2000). The instant refund claim is a continuation of Plaintiffs' “brazen” “tax-avoidance scheme.” Gov't Opp. & Cross Mot. at 5; see also id. at 6–13 (characterizing Plaintiffs' previous “[s]ham [t]rust [s]tructure and 2005 Tax Court [l]itigation,” and questioning Plaintiffs' 2001 tax return).

Originally the taxpayers filed a joint zero-taxable income return Form 1040EZ for the tax year 2001, then they filed a revised joint tax return claiming an adjusted gross income of $310,701. And then they filed another 1040X.

While the proceeds of a loan refinance are not taxable, is it any surprise that the IRS was suspicious?

And the moral of the case? A brief description of a case, no matter how carefully written and edited, does not tell the whole story. And, many times, we need the truth, the whole truth, and nothing but the truth.

GOING GREEN

In the words of Sesame Street’s Kermit the frog, “It’s not easy being green.” At least that is what a lot of business leaders around the world are discovering. Finding leaders who understand environmental and sustainability issues is difficult and the absence of these leadership skills is probably one of the greatest challenges facing countries wanting to make the move to a low carbon economy.

Whether you believe that going green is necessary or not you have to ask yourself; are our current business models sustainable? How long will it be until we run out of oil or the polar ice caps melt if we don’t reduce our carbon emissions? In order to implement the changes that may be necessary we need leaders with the appropriate leadership skills. There is an organization in the UK, “Business in the Community,” along with several other groups that are developing a best practices guide for sustainable leadership for a wide-range of employees including senior managers, middle managers, customer-facing staff and the general workforce. They have described these key leadership skills as “the ability to develop a long term vision of how the organization will contribute to a sustainable economy, the ability to inspire a broad range of people internally and externally and the ability to work collaboratively with different stakeholders.”

Going green is already having an impact on accounting and tax practices in the US as evidenced by the green initiatives included in some of the 2009 tax acts passed by Congress. If you would like to learn more about these green tax initiatives just click on the following link to a four hour self-study course titled “Going Green Under the New Tax Law.”

http://trainingcpe.thomson.com/CourseFinder/Tax_and_Accounting_Courses.asp?startdate=7/29/2010&enddate=&keywords=Green&category000022=on&featuredlist=&limittodates=&zipcode=&zipradius=25&detaillevel=0

Going green and being green may be just as difficult for us as it is for Kermit the Frog but it may be inevitable. What do you think?

THE FIRST STEP

The curtain is rising on Act One of the new IRS play, which will add rules on preparer behavior. The first stage is simple: we must all register with the IRS.

Proposed §300.9 establishes a $50 user fee to apply for or renew a PTIN. The $50 user fee is based on an annual PTIN renewal period, and the procedures for renewing a PTIN will be provided in other guidance, including forms and instructions. The user fee is nonrefundable regardless of whether the applicant receives a PTIN. PTINs were previously issued to tax return preparers solely for the convenience of the tax return preparers, providing an alternative to using the tax return preparers' social security numbers. Requiring registration through the use of PTINs will enable the IRS to better collect and track data on tax return preparers. This data will allow the IRS to track the number of persons who prepare returns, track the qualifications of those who prepare returns, track the number of returns each person prepares, and more easily locate and review returns prepared by a tax return preparer when instances of misconduct are detected.

A public hearing has been scheduled for Tuesday, August 24, 2010. This is a comment period that we can all participate in.

The statute itself is very simple:

Par. 11. Section 300.9 is added to read as follows:

§300.9 Fee for obtaining a preparer tax identification number.

(a) Applicability. This section applies to the application for and renewal of a preparer tax identification number pursuant to 26 CFR 1.6109-2(d).

(b) Fee. The fee to apply for or renew a preparer tax identification number is $50 per year, which is the cost to the government for processing the application for a preparer tax identification number and does not include any fees charged by the vendor.

(c) Person liable for the fee. The individual liable for the application or renewal fee is the individual applying for and renewing a preparer tax identification number from the IRS.

(d) Effective/applicability date. This section will be applicable on the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register.

Your thoughts? Remember, the comment period is still open. Let the IRS know your thoughts.

And remember, this is only Act One. We'll keep you posted as matters progress.

The Ever Elusive Materiality

Just what is materiality and why is it so elusive? It is somewhat like pass interference; difficult to describe, but I know it when I see it. Materiality is elusive partly because it requires the use of professional judgment to determine it. Your professional judgment is not always the same as mine, so is my determination of materiality better than yours; certainly not. When using your professional judgment in determining materiality, the number you arrive at will depend upon which variables you choose when making your estimate. Materiality is measured in several different ways, such as:

· in relation to something else (financial statements, account balance, compliance requirement)
· by size or as a percentage of something
· a threshold or cutoff point

Also materiality is not a constant. It changes from one entity to another or from one year to another. So how do the standard setting bodies define materiality? Here are the definitions from the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC) and the International Accounting Standards Board (IASB):

FASB – US GAAP – “…the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.”

SEC – uses the same information the courts do in interpreting the federal securities laws. The Supreme Court has held that a fact is material if there is...”a substantial likelihood that the…fact would have been viewed by the reasonable investor as having significantly altered the”total mix” of information made available.”

IASB – International GAAP – “Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cutoff point rather than being a primary qualitative characteristic which information must have if it is to be useful.”

Based on these definitions then can we say that materiality is calculated by applying multiple variables to unknown conditions to arrive at the magical number; “materiality?” Well at least it is a logical approach to determining this threshold or cut off point but after all isn’t the most important part of this equation your professional judgment? What do you think?

Love and Marriage

The United States District Court, District of Massachusetts, issued a decision on July 8, 2010 on Nancy Gill & Marcelle Letourneau, et al., v. Office of Personnel Management. The case has a very important tax issue. And that issue is, who exactly can file under the married filing status.

The case presents a challenge to the constitutionality of Section 3 of the Defense of Marriage Act (DOMA). The seven same-sex couples contend that they have been denied certain federal marriage-based benefits that are available to similarly-situated heterosexual couples, in violation of the equal protection principles in the Due Process Clause of the Fifth Amendment.

The court agrees with the couples that there is an irrational prejudice which prevents the same sex couples the same rights as heterosexual couples. The court states:

In the wake of DOMA, it is only sexual orientation that differentiates a married couple entitled to federal marriage-based benefits from one not so entitled. And this court can conceive of no way in which such a difference might be relevant to the provision of the benefits at issue. By premising eligibility for these benefits on marital status in the first instance, the federal government signals to this court that the relevant distinction to be drawn is between married individuals and unmarried individuals. To further divide the class of married individuals into those with spouses of the same sex and those with spouses of the opposite sex is to create a distinction without meaning. And where, as here, “there is no reason to believe that the disadvantaged class is different, in relevant respects” from a similarly situated class, this court may conclude that it is only irrational prejudice that motivates the challenged classification. As irrational prejudice plainly never constitutes a legitimate government interest, this court must hold that Section 3 of
DOMA as applied to Plaintiffs violates the equal protection principles embodied in the Fifth Amendment to the United States Constitution.

As such, the court holds that the couples would file as married under Internal Revenue Code 7703(a)(1) and be entitled to the married rates, whether filing jointly or separately.

If you have any same sex couples, this is an important case to read and understand. I don't expect this to be the last development in this issue, do you?

I CAN SEE CLEARLY NOW

Now I can see why everyone wants a piece of the action; first the FASB and now the ASB. Have you heard of The Clarity Project? It is a multi-year effort undertaken by the Auditing Standards Board (ASB) to reformat and redraft all of the existing U.S. auditing standards for nonpublic companies while converging them with the International Standards on Auditing (ISAs).

I personally think that the codification of the FASB standards was extremely beneficial since it combined more than 20 different sources of GAAP into one logical and orderly system. The benefits from the Clarity Project probably won’t be quite as dramatic as the FASB Codification because the auditing standards had already been codified but there will be benefits from the project. Those benefits will come from the goals of the project. The goals are to:

• Establish objectives for each of the standards and define the auditor’s obligations related to the objectives.
• Make structural and drafting improvements to the standards so they’re easier to read and understand.
• Include, in the explanatory material of the standards, special considerations related to audits of both governmental entities and small entities.
• Converge with the ISAs or clearly establish reasons for divergence from those standards.

Unless there is a practical need for issuing a standard earlier, all of the revised standards will be issued on the same date. The revised standards will be effective for periods ending on or after December 15, 2012, with early application prohibited. The previous effective date of December 15, 2010 was changed by the ASB in May of this year in order to allow more time for finalization of the standards as well as to give more time for training and updating of firm methodologies.

Similar to the FASB Codification project, you can expect an entirely new body of authoritative U.S. auditing literature for nonpublic companies starting in 2013. I think this revision of the auditing standards codification will be a significant step in improving the usability of the standards and in bringing the U.S. more in line with the international audit community. What do you think?

YOU CAN’T BELIEVE WHAT YOU READ IN THE PAPERS

Misleading headlines really irritate me, but I must admit they usually get me to read the article or at least enough of it to know that I have been had. For example the headline “Supreme Court Rules PCAOB Unconstitutional.” Wow now you really have my attention. So the PCAOB has been declared unconstitutional. What does this mean for oversight of the accounting profession? Will the PCAOB be disbanded?

As I began to read the articles I immediately became confused. Confusing me is never very difficult. The article went on to say that by a vote of 5 to 4 the court had ruled that the PCAOB violated the Constitution’s separation of powers principle because their board members are not appointed by the president, but rather by the Securities and Exchange Commission with consultation with the Federal Reserve chairman and the Secretary of the Treasury. I guess that what really started me scratching my head was a few paragraphs further into the article there was a quote from the chairman of the PCAOB saying that he was pleased with the decision. Now I am really confused. Why would the chairman of an organization that has just been declared unconstitutional be happy about that decision?

As always the devil is in the detail. What the court had actually ruled was that the Board’s existence does NOT violate the separation of powers, but the method by which board members can be removed does violate the constitution. Previously the SEC could only remove PCAOB board members for good cause. So with this ruling the SEC will now be able to remove board members “at will” and not just for good cause. All of the other operations and activities of the PCAOB will remain intact.

So the next time you have someone ask you if you heard what was in the paper you might want to take it with a grain of salt until you have a chance to check it out for yourself. What do you think?

Summertime for ROTH

To the tune of George Gershwin, lyrics of Dubose Heyward:

Summertime
And the livin' is easy
Fish are jumpin',
And the cotton is high.
Oh, your daddy's rich,
And your ma is good lookin',
So hush, little baby,
Don' yo' cry.

When I sing these lyrics, and I am a big fan of the classic American song book, I think of ROTH IRA conversions. Really, I do!

2010 is the time to think about converting the regular IRA to a ROTH IRA. You do pay tax, but you get to spread the tax out over the next two years, and there is no longer any AGI restriction. The Wall Street Journal had a recent article where they mentioned that some notable people will be doing the conversion, including Michael Graetz, the brilliant tax professor.

Should you convert? It depends. And therein lies the genius of the lyrics of Porgy and Bess. To determine whether the conversion makes sense, you must run the figures for your client. And during the summer doldrums is a wonderful time to crunch numbers.

And the conversions seem to make sense if your daddy's rich, especially given that future tax brackets might be higher than they are presently. If your clients are in the roughly 50% of the population that do not pay income tax, conversion is not advised. And, as for the little baby, remember that ROTH distributions are tax free and there is no RMD, so conversions are great for that little baby.

But do the calculations carefully. Or else you'll be singing Ira Gershwin's words, “Oh, I got plenty 'o nuthin'.”

The Face Behind the Blog

Editor Winford Paschall with a quick behind-the-scenes look at the CPE & Training Blog—a great way to stay current and share your opinion on tax and A&A issues.

Father's Day and Taxation

Father's Day, 2010. My wife and daughter cooked up a delicious breakfast of buttermilk waffles. The key is: buttermilk. It makes everything better. Turns ordinary waffles into extraordinary waffles. Combine buttermilk with love and, well, you've got it made.

My wife is is out running chores, my daughter is out running, jogging, I took a brief bike ride, came home, and sat down to read Chapter Five, Choice and Happiness from The Paradox of Choice by Barry Schwartz. In it, he speaks about a psychology experiment which is pertinent to all tax practitioners. The chief experimenter, Martin Seligman, ran an experiment teaching a group of animals to jump over a hurdle to avoid an electric shock (which is similar to a tax audit, but less painful). One group of animals had previously learned a different way to avoid the shock, but that method would no longer work. Another group had never learned to avoid shocks. The result of the experiment was that the animals who had previously learned how to avoid shocks learned the new method more quickly than the group which had never learned any technique to avoid a shock.

So, Abe, what has this to do with tax practitioners? Easy. We are like those animals. We have learned tax law and we have learned tax planning approaches that serve our clients well. Congress continues to change the law but, because we have prior experience, we can more easily learn the new law than someone entirely new to the profession. Or, think of it this way, we are the experienced animals and our clients are the animals who have never learned any technique. That's why they continue to come to us for help.

The law continues to change. The end is not in sight. What we used to know no longer applies. But we have learned how to learn. We have learned how Congress thinks, or doesn't think. We have learned about dealing with the IRS. Maybe it is true, maybe there is nothing new under the sun. Maybe what Congress passes is just a variation of what came before. But even if they come up with something entirely novel, we can adapt more easily because of what we have learned previously.

This is why continuing professional education is so important. In Los Angeles, where I live, the victory of the Lakers is being celebrated. And they won because, well, because they are good and they stay in shape. They have new competitors, but they stay in practice. And continuing education keeps us in practice, keeps us in shape.

When, on my bicycle ride, I went by cars with Laker flags waving, I picture all of us, as experienced tax practitioners, with our winning pennant in the race. The route may change, but the footwork basics always apply.

Your thoughts?

Best,

Abe Carnow

Free Debt or is it Debt Free?

I was watching a TV news program the other evening where a reporter was interviewing a man in California about the home mortgage crisis. The man explained to the reporter that the home he and his wife had purchased about three years ago for $800,000, was now only worth about $375,000. As a result they had decided to simply walk away from the home and stop making loan payments even though they could afford to continue to pay the monthly installments. I wondered why the reporter never mentioned anything about a potential tax liability related to debt forgiveness. I was remembering back several years ago when one of my clients faced a debt forgiveness issue with a totally different outcome. The client was struggling to make a go of it in a retail business. When the client finally gave up and closed the business, the suppliers were kind enough to forgive the debts they were owed for inventory purchased and sold by my client. Needless to say you can imagine how shocked my client was when I told them that they owed some $25,000 in income taxes. Their response was a predictable, how can we owe income taxes when we have no assets, no cash and our business is a total loss? I explained to them that if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount is usually considered taxable income and you will have to pay income taxes on the dollar amount of the debt forgiven.

So why wasn’t the reporter mentioning this possibility to the California couple? Well, the answer is the Mortgage Forgiveness Debt Relief Act of 2007. This act generally allows taxpayer to exclude income from the discharge of debt on their principal residence so long as the debt is secured by the home. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. Bankruptcy and insolvency of the taxpayer also qualify for the exclusion.

The provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

So why did my client owe taxes on their forgiven debt? The reason is that their debt was business debt and not personal debt related to their principal residence. For more information about cancelled debts see the IRS Publication 4681 and IRS news release IR-2008-17.

So what do you think about debt forgiveness? Should taxpayers like the couple in California be allowed to simply walk away from their mortgage? If they walk away from their mortgage, won’t you and I ultimately end up paying for it through our taxes?

CP2000 letters by the dozen

The letters usually begin with ominous words: “there is an error on your tax return.”

I’m speaking of course of the CP2000 forms that have been flooding my mail box since right around April 15; it’s almost like the IRS was told to wait until tax season is over and then to let them rip.

The CP2000 is used by the IRS to notify taxpayers of items which do not appear on the 1040 but which have been reported by third parties--usually on a 1099. The IRS’s choice of words can be quite frustrating. They assume that there is an error on the return. They assume that they are right and that the taxpayer is wrong. Therefore included in the form is a computation of tax deficiency, interest and sometimes penalties.

In my experience the IRS is usually wrong in their assumptions. Frequently one receives such a form because the IRS has not been able to match their information with that properly reported on the tax return. Fortunately all it takes to get the matter resolved is a letter of explanation. Still it is frustrating that my clients are being told that I made an error on their return. An unexpected letter from the taxing authorities can be stressful enough; I do not need them being informed erroneously that their accountant is making mistakes! Furthermore, I wonder how many taxpayers do not understand the nature of a CP2000. They might simply pay the amount requested rather than take the time to find out what the form means.

Am I the only one receiving what seems like an inordinate number of CP2000 forms from the IRS this year? Feel free to leave a comment if you have received a CP2000 form recently, especially if it is for something really bizarre.

Is Getting it Right More Important than Getting it Back?

The other day I read about a recent Grant Thornton, LLC, survey of some 496 top U.S. financial executives. The survey asked what was the top priority of their tax departments. They concluded that the number one priority was not how much tax they can save the company, but rather providing timely and accurate tax return preparation and compliance. I agree that any self-respecting tax department is going to be focused on providing timely and accurate return preparation and compliance. However, it is hard to imagine that they are not just as interested in saving the company the most they legally can on their taxes. Now don’t get me wrong--I agree with the survey that accuracy and compliance is the number one priority of most tax departments; however, I would bet that tax avoidance is probably number 1A. Maybe they haven’t heard about “Transfer Pricing.”

It is estimated that U.S. companies legally avoid paying about $60 billion in federal income taxes each year through the use of transfer pricing. (Transfer pricing is the practice of pricing contributions transferred within an organization, which affects the amount of taxes owed.) The article mentioned a company that had sold $2 billion worth of a particular drug. All of these sales were made in the U.S. to U.S. customers, but by using transfer pricing to transfer the profits from the sales of this drug to its Bermuda subsidiary, the company paid no U.S. income taxes on the profits. (Bermuda does not have a corporate income tax.) So is getting the tax return and compliance right really the top priority of corporate tax departments or is it actually how much of a refund they can get back for their employers--or, better yet, avoid paying in the first place? I think that accuracy and compliance are probably the top priority but I would wager that tax avoidance is a very close second. What do you think?

THE HANDWRITING ON THE WALL MAY BE A FORGERY

What do Bernie Madoff, the Stanford Financial Group and Akai Holdings all have in common? Answer; they were all involved in major financial frauds. Almost a day doesn’t go by that the news media isn’t reporting another suspected financial fraud. So, is there an opportunity here? If you are an accountant or an auditor you are in luck. CPAs in today’s business environment are being called upon to apply their professional skills in the legal arena more and more frequently; especially in the area of forensics. The term “forensic” means suitable for use in a court of law.

The AICPA says that there is a growing demand for CPAs skilled as forensic accountants or forensic auditors. The terms forensic accountant or forensic auditor are used interchangeably since both perform the same basic functions. They may also be referred to as investigative auditors.

The forensic auditor will use their understanding of financial reporting systems, accounting and auditing standards and procedures, evidence gathering and investigative techniques to perform their engagements. Quite often the forensic auditor will be required to report his or her findings in a court of law.

Forensic auditors may be called upon to examine financial documents in white collar crimes such as:
· Fraud
· Identity theft
· Embezzlement
· Securities fraud, and
· Insider trading

The forensic auditor may also be asked to:
· Investigate potential financial frauds
· Calculate and quantify losses or damages
· Analyze lifestyles for spousal support purposes
· Determine income available for child support

Forensic auditors may have one of more of the following professional credentials:
· CPA – Certified Public Accountant
· CFE – Certified Financial Fraud Examiner
· CFF – Certified in Financial Forensics

If you would like to know more about forensic accounting or auditing, click here for a list of courses on forensic accounting and auditing.

So what do you think? Should you add forensic accounting or auditing to the list of services you provide?

We’re From the Government and We Need HELP!

You know it seem like a day doesn’t go by that there isn’t a story on the evening news or in the local paper about another governmental entity struggling to address a significant budget short fall. This is a problem that seems as though it should have a very simple solution. The government should simply live within its means and reduce their spending like you or I have to do; but that’s easier said than done. When you consider that 60 to 80% of a governmental entity’s budget usually goes to pay salaries and benefits you realize that solving the problem is not as simple as it first appeared. Where 80% of a governmental entity total budget is expended on salaries and benefits a reduction of 10% of the entity’s total budget is actually a 50% reduction of non- salary related expenses which is usually not a viable option. So what are their options?

The governmental entity basically has three options; raise taxes or reduce expenditures, neither of which is a popular solution, or there is bankruptcy. Chapter 9 of the U.S. Bankruptcy Code specifically addresses municipalities which include cities, counties, townships, school districts, and other special districts, but not states. In the 70-plus years since Chapter 9 has been part of the bankruptcy code, relatively few municipal bankruptcies have been filed. However, recent events and the current economic environment have made municipal bankruptcy a more prominent issue and provided a greater need to address the accounting implication that result from these filings. So in December 2009 the Governmental Accounting Standards Board issued GASB Statement No. 58, Accounting and Financial Reporting for Chapter 9 Bankruptcies, establishing requirements for recognizing and measuring the effects of the bankruptcy process by governments on assets and liabilities and classifying changes in those items and related costs. The Statement applies to all governments that have petitioned for relief under Chapter 9 or have been granted relief under the provisions of Chapter 9, including governments that enter into bankruptcy and are not expected to emerge as a going concern. The Statement does not apply to troubled debt restructurings that occur outside of bankruptcy. The Statement requires governments to re-measure liabilities that are adjusted in bankruptcy when the bankruptcy court approves a new payment plan. For governments that are not expected to come out of bankruptcy as going concerns, assets should be re-measured based on the amount expected to be received. GASB No. 58 is effective for periods beginning after June 15, 2009, with retroactive application required for all periods presented during which a government was in bankruptcy.

Bankruptcy is usually a means of last resort but I have seen at least one other very innovative way in which a government tried to close their revenue gap. They offered to their citizens the opportunity to buy naming rights to street lights and various other governmental infrastructures. So why shouldn’t government sell naming rights to their infrastructures, all of the major sports teams sell the naming rights to their stadiums? I don’t think that I would want my name on the local waste water treatment plant but city hall might be nice. What do you think?

BIG GAAP/LITTLE GAAP

We were once the world leader in a lot of things but it seems here lately we are always the last one to the dance. For example, the accounting profession in the US has been arguing for years about whether we should have two sets of accounting standards; one for public companies and another for private companies. To our chagrin the International Accounting Standards Board (IASB) accomplished in a couple of years what we have been unable to do in decades; establish GAAP for non-public companies.

Late last year, the AICPA and the Financial Accounting Foundation (FAF) announce the formation of a blue-ribbon panel to address how accounting standards in the US can best meet the needs of users of private company financial statements. The formation of this panel represents the latest in a series of developments related to the big GAAP/little GAAP debate.

Also in January the Private Company Financial Reporting Committee (PCFRC) sent the chair of the FAF a letter in which it recommended that the FAF address the issue of private company accounting in the context of the FASB’s mission. The PCFRC also indicated its preference for a separate, stand-alone set of accounting standards for private companies in the US. When announcing the formation of the blue-ribbon panel, the president of the FAF indicated that the FAF had heard from the PCFRC and many others about the need to address the issue of private company GAAP. Although the panel is not yet fully staffed, it’s expected to issue recommendations sometime this year. It shouldn't take a year; they have a complete set of non-public company GAAP standards prepared for them by the IASB. The panel is expected to provide recommendation to the future of accounting standard-setting for private companies, including whether there is a need for separate standalone accounting standards for those companies.

Do you think that if the IASB had not issued their International Financial Reporting Standards for Small to Medium Sized Entities (IFRS for SMEs) that we would have a blue-ribbon panel trying to address the issue? I don't, what do you think?

Sign Me Up, Boys!

In January the IRS announced their tax preparer initiative that will require some 1.2 million (that’s the IRS’s estimate) unenrolled tax preparers to successfully complete competency testing and mandatory continuing professional education. Attorneys, CPAs and enrolled agents will be exempted from the competency testing.

So is such a program really needed? Evidentially the answer is YES. On April 8, 2010 the Feds charged 26 New York tax preparers with allegedly filing some 35,000 suspected fraudulent income tax returns. Generally here is what they are proposing:

1. All paid signing preparers, regardless of their license, must register with the IRS and obtain a preparer tax identification number (PTIN). Note: the IRS will charge a fee for registration and renewal. The amount is yet to be determined. Tentative introduction of the program for registration is September 1, 2010.

2. Unenrolled preparers will be required to complete competency testing and mandatory continuing education. No one will be grandfathered in so an unenrolled preparer’s work experience will not exempt them from taking the tests.

3. There will be at least two tests; one on wages and non-business 1040 preparation and one on wages and small business preparation.

4. Existing preparers will have approximately three years to pass the competency testing requirement. Passing the exam is similar to the CPA exam in that you only need to pass the exam once.

5. Once a preparer passes the exam they will be required to obtain 15 hours of continuing professional education annually. The training must me composed of three hours of federal tax law update, two hours of ethics and 10 hours of other income tax related topics.

6. All tax return preparers will be required to comply with Circular 230 ethics requirements relating to practice standards that every tax professional must follow if they want to represent clients before the IRS.

There are still a lot of unanswered questions that will have to be addressed before we really know what is going to be required by the initiative but it is obvious that the IRS is determined to reduce the amount of fraudulent returns that are filed each year so stay tuned.

Taxes

Someone once said that the only two sure things in life are death and taxes. Oh, by-the-way have you filed your 2009 Federal Income Tax return yet? Time is running out.

Are you one of those procrastinators who wait right up until the last minute to file your return, or do you file early and have your refund spent before the due date rolls around? Either way you must admit that the tax laws, on which your return is based, are getting more complex every year.

Preparing and filing your income tax return once was relatively simple, but not anymore. Unless you only have W-2 income and elect the standard deduction you had better seek professional help in preparing your return lest you run afoul of the IRS or miss some deduction that you are entitled to claim. Return preparation is a complex process and even with today’s tax prep software the user must have a good understanding of the Federal tax laws in order to properly enter the information in the software program so it will be reported correctly on the tax return.

I saw a cartoon of a tax return once that only had two lines. The top line asked “How much did you make?” and the bottom line said “Send it in.” If our tax laws continue to grow in complexity we may find that the cartoon has become reality. I don’t think that we have quite reached that point yet but what do you think?

HIRE BABY HIRE

The Hiring Incentives to Restore Employment Act (HIRE) also known as the “jobs bill,” was signed into law by the President on March 18, 2010. The bill contains temporary tax breaks for employers who hire and retain unemployed workers as well as a couple of other job related incentives. There are four major provisions of the bill:

· Payroll Tax Holiday. Qualified employers are relieved of the employer share of OASDI tax (6.2%) on newly hired unemployed workers. The new worker must not have been employed for more than 40 hours during the previous 60 days and must not be hired to replace a current employee unless that person resigned voluntarily or was terminated for cause. The worker must be hired after February 3, 2010 and before January 1, 2011. The relief applies to wages paid after March 18, 2010 and before January 1, 2011.

· Retained Worker Credit. A $1,000 income tax credit can be claimed for each “retained worker” who remains on the payroll for 52 weeks. A retained worker is a newly hired unemployed worker as defined above. The tax credit will be taken in the employer’s 2011 tax return.

· Section 179 Limits. For tax years beginning in 2010 the maximum amount of Section 179 fixed assets that can be expensed is $250,000 and the maximum amount of 179 purchases before reduction is $800,000. These are the same amounts that were allowed for 2009.

· Highway and Mass Transit Funding. The bill also included funding for some highway and mass transit projects as well as increases to the Build America Bonds program. This program is designed to help fund state and municipal construction projects.

It has been reportd that the bill is viewed by some congressional members and economists as being too small and ineffective. What do you think?

To learn more about the HIRE Act be sure to attend the upcoming Gear Up Mid-Year Tax Update. For more information go to http://gearup.com/Apps/cart/BrowseByTopic.aspx?Code=10-s210

Let’s Hire a Bunch of Auditors

Along with millions of Americans I watched the Congress pass President Obama’s health care reform bill the other night. Obviously my first question is what does it mean for me? The next thing that came to mind is why are we expanding Medicare and Medicaid, two of the most fraudulent government programs ever created? Part of the bill included an increase in Medicare taxes of nine tents of a percent on income over $200,000 for single tax payers and over $250,000 for joint filers to help fund the cost of the program. I think I may have a better suggestion on how to help fund the program. Let’s hire a bunch of auditors!

Senator Tom Coburn (R-Okla) says that “Medicare has at least $80 billion or more in fraud annually.” The U.S. Senate Permanent Committee on Investigations in 2008 reported that “Medicare paid dead physicians 478,500 claims totaling up to $92 million from 2000 to 2007.” How long would it take to compare these claims against the Social Security death index to see if the recipient is still living? There are numerous stories of Medicare paying for walkers for paraplegic patients and patients with sinus problems. Doesn’t anyone look at these claims for reasonableness; apparently not. In fact claims are paid by computer without any human intervention. There are very few controls and almost no checks and balances. One writer suggested that if you want to steal from Medicare learn how to bill for your lies correctly then your claims will be paid in full and on time.

Here is what I think should be done. Hire a consulting firm, preferably an accounting firm, to redesign the Medicare payments system with actual controls. Next, hire a few hundred auditors to audit Medicare reimbursement requests for reasonableness. This should substantially reduce fraudulent Medicare claims and decrease expenditures. In fact the government has said that for every dollar they invest to fight fraud they get $1.55 in return. I think a 55% return on your investment is pretty good. What do you think?

GRC and You and Me

What is GRC? What started it? Who is the best at it and how does it affect me? I will see if I can explain. Wickipedia defines Governance, Risk Management and Compliance (GRC) as “the umbrella term covering an organization’s approach across these areas. GRC typically encompasses activities such as corporate governance, enterprise risk management (ERM) and corporate compliance with applicable laws.”
The three most common areas within GRC are, Financial GRC, IT GRC and Legal GRC.

To some degree, GRC has always been a part of large corporate operation. GRC is not new but the emphasis on it by major corporations is basically a response to the increasing complexity of their operations, globalization, increased mergers, heightened regulatory scrutiny and the relatively recent multitude of corporate frauds and failures, some simply from greed and others from bad business decisions. But what really spurred the interest in GRC was the issuance of the US Sarbanes-Oxley Act (SOX) and the need for public US companies to design and implement suitable governance controls for SOX compliance. Sarbanes-Oxley, however, is no longer the main driving force behind GRC. A recent study commissioned by KPMG International found that companies are embracing GRC to avoid business failures and non-compliance by expanding their GRC departments. You can read the entire article at http://www.kpmginstitutes.com/404-institute/insights/2010/pdf/eiu-survey-convergence-challenge.pdf

Forrester Research, Inc. recently evaluated the top 14 enterprise GRC platform vendors using some 80 criteria. The objective of this research was to determine who the market leaders were in this area. Thomson Reuters – Paisley, BWise, and OpenPages earned the highest scores overall due to their comprehensive capabilities and strong strategies. You can access more information about the Thomson Reuters – Paisley group at http://www.paisley.com/website/pcweb.nsf/pages/ARAE-7N3MQD

So how does this affect you? Well for one thing it has created a job boom in the GRC area with companies rushing to create Governance, Risk and Compliance departments and groups internally to address these issues. These efforts were often not completely successful because GRC initiatives require an integrated approach and an enterprise-wide view of risk and compliance. I think that the opportunities in this area will continue to grow for CPAs to use their experience and knowledge to make a valuable contribution to their employers and improve the company’s compliance and risk management. What do you think?

Non-profit Organizations Beware!

On January 21, the IRS issued notice IR-2010-10 reminding tax exempt organizations that in 2010 their tax-exempt status will be automatically revoked, if the entity has not filed the required form in the last three years. So what is this all about; exactly what must be done and when is the deadline?

The Pension Protection Act of 2006 contains the automatic revocation provision. The Act says that non-profit organizations that do not file a required information form for three consecutive years automatically lose their Federal tax-exempt status. The Act went into effect at the beginning of 2007 therefore the initial three year period is now up. If an organization loses its exemption, it will have to reapply with the IRS to regain its tax exempt status. Also, any income received after the revocation date may be taxable.

Small non-profits with annual receipts of $25,000 or less can file an electronic notice, Form 990-N (e-Postcard). They will only need a few pieces of basic information for the filing. Non-profits with more than $25,000 in annual receipts will need to file Form 990 or Form 990-EZ annually. Private foundations file Form 990-PF. Churches and integrated auxiliaries of churches are not required to file any notices or returns.

Form 990-series returns and e-Postcards, are due by the 15th day of the 5th month after an organization’s tax year ends. Don’t miss this date; the consequences of doing so will be maddening if not downright costly. Additional information is available from the IRS at http://www.irs.gov/newsroom/article/0,,id=218550,00.html

Telecommuting, Has Its Time Come

The ubiquitous use of computers and the Internet has spurred the growth of telecommuting; the activity of working outside the traditional workplace. Telecommuting has become a popular practice both from the employee’s perspective as well as from the employer’s point of view. One of the reasons that telecommuting has recently become so popular is because it is considered a green initiative. Removing cars from our highways reduces pollution levels and that’s a good thing. There are a lot more positives than negatives associated with telecommuting. Here are just as few of each:

Positive

Employee
1. Lack of interruptions.
2. No commuting.
3. Reduced personal expenses.
4. Flexible hours.
5. No child care expenses.
6. Work in your pajamas.

Employer
1. Reduced business interruption costs.
2. Reduced need for office space.
3. No relocation expenses.
4. Increased productivity.
5. Reduced employee tie off for appointments.
6. Attract the best employees.

Negative

Employee
1. Lack of socialization.
2. Coordination of work with others.

Employer
1. Not always physically accessable.
2. Managing people is a problem.

I think that telecommuting is a trend that is here to stay. There are just too many cost cutting, time-savings, and environmental benefits for both employees and employers for its growth not to continue. What do you think?

Instant Gratification

I think you will agree that we live in a world that demands instant gratification. This is a phenomenon, which is associated more with today’s generations than with mine. I must admit, however, that I have succumbed to the seductive nature of instant gratification. We want everything and we want it now! Just think about it. There is instant messaging, instant food, instant drinks, instant news coverage, instant cures, instant banking, the Internet, e-mail, express mail, and same day delivery. When I sat for the CPA exam it took up to three months before I received my grades; usually just in time to register for the next exam. Now that the CPA examination has been automated you can take the exam online and get your scores immediately thus delivering your instant gratification. This approach to testing has also arrived in the continuing professional education arena with online grading of CPE exams. I wonder why anyone would want to take a test, mail it in for grading and then have to wait weeks for the results when the same service is available online and provides instant gratification. One reason may be that there are people out there of my generation who are still hanging on to the old way of doing things. Do you think that once this generation retires from the profession that at some time in the future the only option available to us will be online grading?