SEC Releases Proposed Rules on Crowdfunding for Security Offerings

The Jumpstart Our Business Startups Act (the JOBS Act) was signed into law in April 2012, and it created a new Section 4(6) of the Securities Act of 1933. This new section exempts crowdfunding security offerings from Securities Exchange Act of 1934 (the Exchange Act) registration and its periodic reporting requirements. The JOBS Act directed the SEC to adopt rules to implement various provisions of the crowdfunding security exemption.

On October 23, 2013, the SEC voted unanimously to release its proposed rules for the crowdfunding security exemption of the JOBS Act (Proposed Rulemaking Release No. 33-9470). The proposed rules appeared in the Federal Register on November 5, 2013, and the comment period runs through February 3, 2014.

Certified public accountants may be interested in these proposed rules if they have clients who desire to sell securities to investors through crowdfunding. In addition, some clients may be interested in purchasing securities that are offered by companies via crowdfunding.

Since the proposed rules are over 500 pages long, today I will only provide background information regarding the crowdfunding securities exemption and mention what entities do not qualify for the exemption and what limitations are placed on investors under the JOBS Act and the proposed rules.

Background

Crowdfunding is a method to raise money using the Internet and serves as an alternative source of capital to support a wide range of ideas and ventures, including charities, civic projects, creative projects, disaster relief, inventions development, and scientific research. When individuals or entities raise funds through crowdfunding, they typically seek small individual contributions from a large number of people. The crowdfunding campaign generally has a targeted amount to be raised and an identified use for those funds. Individuals interested in the campaign may share information about the endeavor with each other and use the information to decide whether or not to fund the campaign.

Crowdfunding has been used to fund, for example, artistic endeavors, such as films and music recordings, where contributions or donations are rewarded with a token of value related to the project. For example, a person contributing to a film's production budget is rewarded with tickets to view the film and is identified in the film's credits. A number of entities operate websites that facilitate crowdfunding, with some websites specializing in certain industries, such as music and the arts. Some of the more popular crowdfunding sites include Kickstarter, Indiegogo, Crowdfunder, RocketHub, Crowdrise, and appbackr.

The idea behind the crowdfunding security exemption in the JOBS Act is to allow private companies to raise relatively small amounts of capital from a large number of investors without having to register the securities issued with the SEC or under state blue sky laws. The proposal would let businesses use the Internet, mobile technology, and social media to raise up to $1 million a year from investors via crowdfunding. Under the JOBS Act, the SEC is required to adjust the $1 million dollar amount every five years to reflect changes in the Consumer Price Index.

Under the proposed rules, the crowdfunding security exemption would not be available to any of the following:

• Foreign issuers
• Issuers already subject to the periodic reporting requirements of the Exchange Act
• Investment companies
• Issuers not having a specific business plan or having indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies
• Issuers that have sold securities in reliance of the crowdfunding exemption during the previous two years but have not filed with the SEC and have not provided to investors the annual reports required by the crowdfunding regulation
• Issuers that are otherwise disqualified because they are associated with felons or other “bad actors”

Limitations for Investors

The original petition to create a crowdfunding securities exemption was submitted to the SEC in 2010 prior to the JOBS Act. Under the terms outlined in the petition, investors would have been allowed the opportunity to help entrepreneurs raise capital by creating an exemption from the federal filing requirements as long as the investors did not invest more than $100 per security offering. Although this petition did not succeed, it did spark an interest in the subject that was realized in the JOBS Act.

Under the JOBS Act and the proposed rules, individual investors who wish to invest in crowdfunded investments would be permitted to invest up to $2,000 or 5% of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.

Investors with annual income or net worth that is more than $100,000 would be allowed to invest up to 10% of their annual income or net worth, whichever is greater but with an annual cap of $100,000.

Investors would not be able to resell the securities for one year.

Investors have an unconditional right to cancel an investment commitment within 48 hours after making it. However, a cancellation during the final 48 hours of the crowdfunded offering is only permitted if there is a material change to the offering terms or to other information provided by the issuer with respect to the offering.

The annual income and net worth limitations have made the maximum allowable investments under the JOBS Act much higher than the cap of $100 per offering that was in the original petition. Perhaps Congress equates success with converting a simple idea to something much more complex? The increase in the investment amount has substantially increased the possible risk to investors. Given that the mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation, this might explain the length of the proposed rules.

In my next blog, we will look at the use of intermediaries and the reporting and disclosure requirements associated with securities offered through crowdfunding.

Valuing and Accounting for In-kind Gifts

With the end of the year rapidly approaching and the holiday season close at hand, you may be thinking about how to get rid of clothes you haven’t worn in several years or that extra piece of furniture you no longer need. Your first thought is probably to give it to a charitable organization.

Have you ever wondered how a nonprofit organization accounts for noncash assets or in-kind gifts? Or maybe you are the accountant for a charity; trying to be sure you have properly accounted for and reported the in-kind gifts your organization received.

Nonprofit organizations receive varied donations from the public, including donations of cash and noncash assets. The accounting recognition and measurement requirements related to noncash contributions are generally the same as those for cash contributions. That is, they are measured at fair value and recognized as contributions when received by the nonprofit organization. There are however, accounting issues specific to certain types of noncash contributions including in-kind gifts. I will try to answer some questions about defining, recognizing, tracking, and finding help for valuing in-kind gifts.

What are in-kind gifts?

Donations such as thrift-store inventory, contributed advertising; and marketing media; donated items sold for fund-raising purposes; gifts of long-lived assets; and vehicles received in connection with vehicle donation programs are examples of in-kind gifts. In-kind gifts include contributions of tangible and intangible personal property. Tangible in-kind gifts include contributions of items such as clothing, furniture, equipment, inventory, pharmaceuticals, and supplies. Intangible in-kind gifts include contributions of items such as advertising, other services that aren’t considered personal services, patents, royalties, and copyrights.

When is an in-kind gift NOT an in-kind gift?

Even if the organization has decided to accept gifts-in kind, it may not be the recipient of a contribution. Sometimes, donated materials or supplies are passed from one organization to another at the request of the donor. If a donor doesn’t give the nonprofit organization the discretion to choose who will get the donated items, the nonprofit organization serves only as an agent, and the donated materials aren’t reported as contributions revenue when received. Likewise, when the nonprofit organization distributes the donated materials or supplies to the ultimate beneficiary, the transfer isn’t reported as a contribution made.

Do in-kind gifts have to be tracked?

Although it can be challenging to track and value in-kind gifts, the difficulty in doing so isn’t an acceptable reason for not recognizing them. FASB ASC 958-605-30-11 states that in-kind gifts that can be used or sold should be measured at fair value. Thus, it isn’t appropriate to state in the notes to the financial statements that the value of noncash contributions isn’t reflected in the financial statements because it is impracticable (or difficult) to estimate the value. It also isn’t appropriate to state that in-kind gifts aren’t recognized because there is no objective means of valuing them. A good faith attempt to determine value results in better information in financial statements about an organization’s level of contributions and programs than no value at all.

Where can I find help valuing in-kind gifts?

Locating resources to assist organizations in valuing in-kind gifts, other than property, isn’t always easy. Authoritative literature provides only broad, general guidance, and many organizations struggle to find useful guidelines to help value donated assets. Four resources providing guidance on valuing various types of in-kind-gifts are as follows:

·       Online prices.

·       Salvation Army’s Donation Valuation Guide.

·       TurboTax® Its Deductible® Software or Book Edition

·       IRS Publication 561, Determining the Value of Donated Property.

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Health Care Reform Raises Rates and Reduces Exemptions

Effective for 2013, new rules have increased taxes or reduced exemptions on higher earning taxpayers, making effective year-end tax planning even more important.

Under the Affordable Care Act there is a higher payroll tax and surtax on unearned income of higher-income individuals. Under the American Taxpayer Relief Act of 2012 higher tax rates apply to ordinary income, capital gains and dividends, while at the same time limitations are imposed on the use of the personal exemption and itemized deductions.

For tax years beginning after Dec. 31, 2012, the following new rules apply:

• Increased payroll tax.  A new 0.9% hospital insurance tax (FICA payroll tax) applies to wages received in excess of $250,000 for joint returns; $125,000 for married filing separate; and $200,000 for all other taxpayers. The additional 0.9% tax also applies to self-employment income that meets or exceeds the above thresholds.
• Surtax on unearned income. An unearned income Medicare contribution tax is imposed on individuals, estates, and trusts. For an individual, the tax is 3.8% of the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over $250,000 for a joint return or surviving spouse, $125,000 for married filing separate, and $200,000 for all others.
• Higher individual income tax rates. The income tax rates for most individuals stay the same as in 2012. However, a new 39.6% rate applies for 2013 income above $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married filing separately.
• Increased capital gain and dividend tax rates. The top 2013 tax rate for capital gains and dividends rises to 20% for taxpayers with incomes exceeding $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married filing separately.
• Personal exemption phase out. There is a personal exemption phase out  for 2013 with a beginning threshold of $300,000 for joint filers and surviving spouses; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married filing separately. Under the phase out, the total amount of exemptions that can be claimed by a taxpayer is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer's adjusted gross income exceeds the above threshold.
• Limited itemized deductions for high earners. There is a limit on itemized deductions for 2013 for earners with a threshold of $300,000 for joint filers and surviving spouses; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married filing separately. Thus, the itemized deductions of taxpayers subject to this limitation will be reduced by 3% of the amount by which their adjusted gross income exceeds the threshold amount. The reduction will not exceed 80% of otherwise allowable itemized deductions..

Year-end tax planning may be especially productive this year because timely action by the taxpayer could secure significant tax breaks.

What do you think?

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Bankrupt Local Governments

Local governments of all sizes are facing significant budget deficits and have been for years. These deficiencies have eroded municipalities’ ability to pay their debts. As a result some municipalities have resorted to filing for bankruptcy protection under Chapter 9, Title 11, of the United States Code. Chapter 9 is available exclusively to municipalities to assist them in restructuring their debts. Most recently the city of Detroit, Michigan took advantage of Chapter 9 and became the largest municipal bankruptcy in U.S. history with debts totaling over $18 billion. Detroit replaced Jefferson County Alabama, as the largest municipal bankruptcy with debts of over $4.2 billion.

According to the website Governing, municipal bankruptcy remains relatively rare. A Governing analysis estimated that only one of every 1,668 eligible general-purpose governments (counties and cities) filed for bankruptcy protection over the past five years. One of the reasons for this low level of bankruptcy filings is that states must have in place laws authorizing municipal bankruptcy before a municipality can take advantage of Chapter 9. Only about half of the states have enacted such laws. The state then must approve of the municipality entering bankruptcy. States that have not enacted such laws often have other measures providing financial relief.

The cause of most municipal bankruptcies can frequently be attributed to the accumulation of large amounts of debt, usually from one or more of the following:

• Unfunded pension liabilities
• Unfunded health care benefits
• Mismanagement
• Over-budget capital projects
• Reduced state and federal aid
• Reduced tax revenues

According to the Wall Street Journal, “Detroit’s municipal pension funds awarded retirees, in some years, more than a 20% return on their annuities even as the funds lost value” contributing to the financial crisis. The pension debt has ballooned to nearly one-fifth of the city’s total debt. CNN reported that “Detroit spends roughly 38 percent of its annual budget on these types of ‘legacy’ costs leaving only 62 percent of spending for education, infrastructure, police and firefighters.”

Municipal bankruptcies are handled at the federal level, so constitutional issues prevent the judge from dictating how a municipality is run. Thus, the judge cannot mandate actions such as tax increases, budget cuts, asset sales or the removal of local politicians.

I think that there should be a mandatory requirement for all politicians, including the ones in Washington, D.C., to take, and pass, a course on fundamental accounting before being allowed to take office. It seems that no one understands the basic concept that if you spend more than you take in, year after year, you will eventually end up like the city of Detroit--bankrupt!

What do you think?

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CRIMINAL ACCOUNTANTS

Embezzlement – The theft or misappropriation of funds placed in one’s trust or belonging to one’s employer.

It seems like all you have to do these days is pick up a newspaper and you will find an article about an embezzlement similar to the following one reported by WFAA.com: “Former Collin Street Bakery accountant accused of embezzling more than $16 million from the renowned fruitcake maker.” What concerns me most about this crime is that the embezzler was the accountant.

The accountant for Collin Street Bakery worked for the company for fifteen years and was a trusted employee. He allegedly spent the last eight of those years embezzling $16.65 million dollars from his employer. The money was used to support an extravagant lifestyle that included 43 luxury automobiles and a house in New Mexico. The person who committed the embezzlement was the employee who understood how the accounting system worked and used that knowledge to cause 888 fraudulent checks to be sent to his personal creditors, according to the FBI.

When I began my accounting career, I pledged to adhere to a Professional Code of Conduct. I also pledged to adhere to my employer’s Code of Business Conduct and Ethics. I take both pledges seriously. Evidentially there are a growing number of accountants who do not feel that codes of conduct apply to them.

In the past few months, I have seen the term embezzlement used too often along with the title “Accountant.” The connection is usually in a newspaper article about an alleged embezzlement committed by an accountant.

Why Are Embezzlements Happening So Often?

According to a survey conducted by the Association of Certified Fraud Examiners (ACFE), instances of fraud are increasing nationwide, both in number of incidents and the dollar amount of the losses.   

Unfortunately this is nothing new. My first audit as a junior auditor forty-five years ago, uncovered an embezzlement of over $75,000 by the accountant. It was not the last audit assignment in which I encountered embezzlement. It may just be better media coverage that has brought this topic to our attention, but it seems to me that embezzlement is more common today than in the past. Maybe it is not just embezzlement. Maybe it is dishonesty in general.

Embezzlements by Accountants

The following examples of embezzlements by accountants in the last five years shows that everyone— Fortune 100 companies, public companies, governmental entities, and small private companies—is susceptible to this crime.

·       Citigroup                                            $19.20  million in losses                   2011

·       Collin Street Bakery                           $16.65  million in losses                   2013

·       South Carolina Education Lottery        $ 226.4 thousand in losses               2012

·       Kemp Construction                            $ 208.0 thousand in losses               2009

In each of these cases, the alleged fraud was perpetrated by a trusted accountant.

How Can these Crimes be Prevented?

Someone once said that “Trust is not an internal control it’s only a feeling.” In all of the examples listed above management or owners of the business trusted their accountant.

Our inherent desire to believe that all of our employees are trustworthy gives us a false sense of security. Add a lack of resources or desire to implement necessary controls and you have a recipe for embezzlement.

The solution to this problem is simple to identify, but often difficult to implement. Separation of duties and implementation or execution of a few internal controls could have prevented or at least reduced the losses in each of the embezzlements listed above. If a company does not have the resources to develop and maintain appropriate internal controls, it is virtually impossible to prevent embezzlement. However, with just a small amount of effort, a company can hold its losses to a minimum.

What do you think?


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The Many Tax Implications of DOMA

The Supreme Court’s decision to strike down the definition of “marriage” as defined in the Defense of Marriage Act (DOMA) is going to have far-reaching tax implications for married same-sex couples. The decision makes it clear that the federal government must recognize a lawful same-sex marriage. However, it left many unanswered questions. Following are just some of those questions:

1. Will the court’s decision be applied retroactively, and if so, to what extent?

2. Since some federal benefits are determined by place of residence, what is the effect on same-sex married couples who marry in one of the states where same-sex marriage is legal, but later relocate to one of the states where it is not legal?

3. Will same-sex married couples be permitted to amend their tax returns for prior years?

4. What if a couple is married in a state that recognizes same-sex marriage, but at December 31, 2013, the couple lives in a state that does not recognize same-sex marriage? Can they file a joint return for 2013?

5. What about decisions made based on filing status that are now too late to correct, such as Roth IRA contributions?

6. Will individuals who filed for automatic extensions for the 2012 tax year have guidance available in time to meet the October 15, 2013, extended deadline?

7. Will the court’s opinion affect same-sex couples in states that sanction domestic partnerships or civil unions?

8. What is the impact on employers with operations in multiple states? Can they apply a single standard or must they apply each state’s rules?

9. Are same-sex spouses entitled to all the survivorship rights given traditional married couples under a tax-qualified retirement plan?

10. Spouses who had health-care coverage, through their employer, for their same-sex partners were taxed on those benefits. Can prior year(s) tax returns be amended to reduce income by those amounts in order to have the tax refunded?

11. Employee Benefit Cafeteria plans can, but are not required to, permit mid-year election changes for certain events. If a plan permits mid-year election changes in connection with the marriage of opposite-sex couples does it have to allow the same change for same-sex couples?

12. What if an employer is based in a state that does not recognize same-sex marriages but has an employee who marries a same-sex partner in a state that does? Which state’s definition of marriage will apply?

And the list goes on.

Same-Sex marriage is legal in 13 states and the District of Columbia but is not legal in the other 37 states. Historically the IRS has deferred to states’ definition of marriage when applying federal tax rules. However if the IRS keeps the state residency policy, then the people in the 37 states where same-sex marriage is not expressly endorsed have gained virtually nothing, tax wise, from the Supreme Court’s decision.

With over an estimated 1,000 federal statutes that now need to be evaluated, and possibly amended to bring them into compliance with the new definition of marriage, looks like Congress will have plenty to keep them busy for years to come.

What do you think?

NEW webinar: The Next Step for DOMA: Implications and Opportunities
This webinar explores the key tax effects of the decision, including filing status, amended returns and protective refund claims, divorce and community property issues, and estate and gift tax planning opportunities. 2 CPE credits. More information.

DOMA Ruling Explained

On June 26, 2013 the Supreme Court ruled the Defense of Marriage (DOMA) act unconstitutional in a 5-4 decision. Specifically, the court struck down section 3 of the act which defines “marriage” as a legal union between one man and one woman and “spouse” as a person of the opposite sex who is a husband or wife. Upon repeal of DOMA, the federal government will now recognize all legal same sex unions in states that allow same sex unions. This aspect of the ruling is quite clear. 

What is not yet clear is the implication this will have on federal tax law and the affect this ruling will have on same sex couples immediately and moving forward. In some ways, this ruling will simplify tax law: same sex couples filing jointly in their state will now be able to file jointly with the federal government as well. Some aspects of the law are less simple and will require further clarification from the IRS as time passes.

Details of the Ruling

Traditionally, the regulation of marriage is an authority granted to the separate states. There are some examples where federal law regulates marriage in order to further federal policy, but generally the federal government seeks to limit the implications of these exceptions. The Supreme Court deemed DOMA §3 unconstitutional because of the far reaching implications of the provision—it affected over 1,000 federal statutes and many regulations.

Furthermore, rather than promote consistency, DOMA treated married couples within the same state differently, imposing restrictions, stigma and disabilities onto a state defined class. Those judges striking DOMA were concerned with the equal protection issues and they argued that the law makes unequal a subset of state-sanctioned marriages in areas ranging from taxes to Social Security and veterans' benefits. It is important to note that the scope of this ruling is confined to only “lawful marriages.”

Immediate Tax Implications

The following are among the tax breaks newly available to legally married same-sex couples:

... the right to file a joint return;

... the opportunity to get tax-free employer health coverage for the same-sex spouse;

... the opportunity for either spouse to utilize the marital deduction to transfer unlimited amounts during life to the other spouse, free of gift tax;

... the opportunity for the estate of the first spouse to die to get a marital deduction for amounts transferred to the surviving spouse;

... the opportunity for the estate of the first spouse to die to transfer the deceased spouse's unused exclusion amount to the surviving spouse;

... the opportunity to consent to make "split" gifts (i.e., gifts to others treated as if made one-half by each); and

... the opportunity for a surviving spouse to stretch out distributions from a qualified retirement plan or IRA after the death of the first spouse under more favorable rules than apply for nonspousal beneficiaries.

Many other tax provisions are affected by a taxpayer's marriage status, such as the deductibility of alimony paid to a spouse or former spouse and the availability of the innocent spouse protections.

Planning Tips

Married same-sex couples who filed separate federal returns due to DOMA should consider filing amended returns with claims for refund, where applicable. Filing jointly may produce a lower combined tax than the total tax paid by the same-sex spouses filing as single persons, but this can also produce a higher tax, especially if both spouses are relatively high earners. Tax professionals should calculate for their same sex couple clients their past returns to determine if an amended return will result in a refund.

Married same-sex couples should also amend their estate plans to take advantage of many of the favorable provisions listed above. It is estimated that there are more than 100,000 same sex marriages in the USA. This means that as many as 300,000 amended returns could potentially be required in the near future. Tax professionals should consider filing protective claims for tax returns for which the statute may be about to expire.

Areas for Further Exploration

Because the recent ruling limits its scope to “lawful marriages” it is yet to be seen how the federal government will handle domestic partnerships and civil unions of same sex couples. It is possible that the current ruling will only affect those couples living in states where same sex marriage is legal.

Additionally, the Supreme Court did not strike down section 2 of DOMA which allows states to refuse to recognize same sex marriages performed in other states. Because of this, a couple may be legally married in one state, but living in a state that does not recognize their marriage as valid. It is yet to be seen how the government will view these marriages on a federal level.

Tax professionals will have to wait for the IRS to issues procedures for dealing with these complicated situations.

The Gear Up Editorial Team

Revisions to the Indoor Tanning Services Excise Tax

The excise tax for indoor tanning services has been around since 2010 as part of the Patient Protection and Affordable Care Act. This tax is the government’s way of trying to get you to stop using indoor tanning services, since using them may cause skin cancer.

This is an example of the U.S. government again enacting legislation in an attempt to influence the choices we make. They learned from Prohibition that outlawing an activity often has little effect on our choices so they opted for the next best thing—they taxed it.

The Internal Revenue Service has revised and finalized the regulations for the 10% excise tax on Indoor Tanning Services (ITS) imposed by this legislation. The temporary regulations, effective July 1, 2010, were revised by the 2013 final version. The final regulations are effective as of June 11, 2013; however, there could be additional revisions in the future.

Some of the 2010 temporary regulations were retained while others were revised or superseded by the 2013 final regulations. Following is a summary of some of the more significant items that changed and those that have stayed the same.

Qualified Physical Fitness Facilities (QPFF)

1. Certain QPFFs, with membership fees that include access to indoor tanning facilities, were exempted from the excise tax by the 2010 regulations even though the QPFFs provide basically the same indoor tanning services as non QPFFs.

2. The 2010 regulations limit the definition of a QPFF to a business that does not charge separately for its ITS, offer ITS to the general public, or offer different membership rates based on access to the ITS. If the business meets all three conditions it is exempted from the tax.

3. The 2013 regulations maintained this exemption despite complaints that the exemption creates an unfair competitive advantage for exempt QPFFs.

Free or Discounted Indoor Tanning Services (ITS)

1. The final 2013 regulations specify that the tax only applies if an amount is paid for ITS.

2. If services are provided at a reduced rate, the tax applies to the amount actually charged for the tanning services.

3. The 2013 regulations specify that the tax does not apply to ITS received for redemption of “bonus points” from a loyalty or similar program.

4. For promotions that include a “free” tan with the purchase of a specific number of tans the purchased tans are considered as a reduction to the price of all of the tans rather than a package of purchased tans at full price along with a “free” tan. The tax is applied to the purchase of the package of tans rather than the redemption of the additional tan.

Bundled Services

1. The 2010 regulations provided a formula to determine the amount reasonably attributable to ITS included in a bundle of services. The 2013 regulations leave the bundled rules intact.

2. If the ITS are bundled with other goods and services, the provider must manually calculate the amount of the payment for the bundled services that is attributable to ITS.

3. The final 2013 regulations authorize the Treasury Department and the IRS to issue future guidance to identify additional options for making this calculation.

Gift Cards

1. An undesignated payment card is defined by the 2010 temporary regulations as an item that can be redeemed for goods or services that may or may not include ITS.

2. The 2010 temporary regulations imposed an excise tax only when the card is redeemed for ITS, not when it is purchased. It was pointed out that a provider can only collect the tax when the card is purchased not when it is redeemed for ITS.

3. The 2013 regulations do not change the 2010 requirements however, they authorize the Treasury Department and the IRS to issue future guidance with respect to undesignated payment cards.

4. As required by the 2010 temporary regulations the excise tax must be reported and paid quarterly on Form 720 “Quarterly Federal Excise Tax Return.”

Membership and Enrollment Fees

1. The 2013 final regulations clarify that the excise tax on ITS is imposed on amounts paid for monthly membership and enrollment fees to a provider of ITS, other than a qualified QPFF, even if the member does not use any ITS’s during the period to which the fees relate.

2. Some providers charge a fee that allows the member to skip one or more months of membership dues without being charged an enrollment fee when they restart their monthly membership. Amounts paid to temporarily suspend a periodic membership program are considered amounts paid for ITS and are subject to the excise tax.

The government has taxed alcohol, cigarettes and now indoor tanning services to try to legislate good health practices. I don’t think that they have been very successful with either alcohol or cigarettes and they probably won’t be very successful with indoor tanning services either. What do you think?



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Three Strikes for the RTRP Regulations?

In baseball it is three strikes and you are out, but what about lawsuits? Three individuals sued the IRS to stop them from implementing their new regulatory scheme for registered tax return preparers (RTRP). Following is the course of events.

January 18, 2013 – As the result of the lawsuit, Federal District Judge James E. Boasberg issued an injunction preventing the IRS from enforcing its new Registered Tax Return Preparer regulations. (Strike 1) The IRS then filed a motion to stay the injunction.


February 1, 2013 – Judge Boasberg denied the IRS’s motion to stay. (Strike 2) The court also went on to clarify the requirements of the injunction and to emphasize that the PTIN (preparer tax identification number) program was specifically authorized by Congress and therefore not covered by the judge’s ruling.


March 27, 2013 – The District of Columbia Circuit Court of Appeals denied the IRS’s request to suspend the January 18th injunction. (Strike 3) A three judge panel upheld Judge Boasberg’s refusal to lift the injunction against the IRS. The court found that the IRS had not satisfied the strict requirements for a stay pending appeal.


The next major step will be a merits briefing which will conclude with oral arguments before a three-judge panel of the District of Columbia Circuit Court of Appeals.


Judge Boasberg did clarify that tax preparers could take competency tests and continuing education courses but only on a voluntary basis while his injunction remained in place.


Has the IRS struck out with its RTRP regulations? Probably not, but it may take an act of Congress to accomplish their goal of licensing all tax return preparers who are not EAs, CPAs, or Attorneys.


What do you think?



RTRP Program Suspended - Answers to Your Questions

As you are probably aware, on January 18, the U.S. District Court for the District of Columbia issued a permanent injunction preventing the IRS from enforcing the RTRP regulations. On Wednesday January 23, the Justice Department, on behalf of the IRS, filed a motion to suspend the injunction pending resolution of the appeal that the IRS intends to file. On January 28, the Plaintiffs filed opposition to the IRS motion to suspend the injunction.

With all of these injunctions, motions, and oppositions you probably have questions about your participation in the RTRP program. Here are answers to some of those questions.


Will I still have to take the RTRP test? – No. At this time the RTRP test is no longer required. As such, the test is no longer offered by Prometrics. However, the Department of Justice, on behalf of the IRS, has filed a motion to suspend the judge’s ruling pending the IRS’s appeal. Stay tuned. The test may be reinstated in the future.


Will I still have to complete 15 hours of continuing education (CE)? – The answer is no, unless you are an EA, CPA or attorney. However, if you prepare individual federal income tax returns, in my opinion, it is in your and your client’s best interest to learn about the new tax laws and regulations affecting 2012 filings. CE is not currently mandatory for RTRPs, and any option to proceed with registering for or participating in a CE program is strictly voluntary.


Do I have to renew my PTIN to prepare tax returns for 2012? – We don’t know at this time. However, the IRS posted the following message on their Facebook page on January 29:


Currently we are working diligently to resolve issues surrounding the issuance of Preparer Tax Identification Numbers (PTINs) for the filing season. Additional information will be provided shortly as to how to obtain PTINs.


May I schedule a date to take the RTRP test? – No. The Federal Judge’s ruling has effectively closed the RTRP testing and registration process for the time being.


I am scheduled to take the RTRP test later this year, can I still take the exam? – No, not at this time. The Prometric testing system for RTRPs has been suspended until further notice. They have indicated that you will be notified when additional information is available.


I have already received my RTRP certificate. Can I continue to use the RTRP designation? – The future of the RTRP designation is currently unclear; however, I have seen nothing that would indicate you could not continue to use the RTRP designation if you have passed the exam and received your certificate.

Can I take the RTRP test prep course for CE? – Currently the judge’s order makes continuing education voluntary, but no CE will be awarded.


I expect that if the IRS does not win their appeal, Congress will pass legislation giving them the power to regulate unlicensed tax preparers…but when that might occur is anyone’s guess. What do you think?

Here Comes the Judge: New Ruling for Registered Tax Return Preparers

On Friday January 18, 2013, Judge James E. Boasberg of the United States District Court for the District of Columbia struck down the IRS’s Registered Tax Return Preparers (RTRP) program and enjoined the IRS from enforcing the regulations.

The Court’s Decision

• Boasberg ruled against the IRS and in favor of the unenrolled tax preparers. The ruling eliminates the requirement for unenrolled tax return preparers to pass the RTRP examination or to obtain 15 hours of continuing professional education each year in order to prepare income tax returns for pay.
• The ruling states that tax return preparers are not “representatives who practice before the IRS.” The court equated “practice” with advising and assisting taxpayers in presenting their cases before the IRS, and filing a tax return would not be described as “presenting a case.”
• The ruling also granted permanent injunctive relief, enjoining the IRS from enforcing its regulation scheme against unenrolled tax preparers.

Options for the IRS

The IRS has the following options:
• Abandon any further attempts to regulate unenrolled tax preparers.
• Appeal the judge’s ruling.
• Seek congressional statutory authority to regulate RTRPs.

Options for the Unenrolled Tax Preparer

RTRP’s have the following options:
• Go about business as usual with no need to pass the RTRP exam or obtain the required continuing education.
• Continue to comply with the RTRP regulations voluntarily.
• Become an Enrolled Agent.

The court ruling striking down the RTRP regulations does not have any effect on the IRS’s Preparer Tax Identification Number (PTIN) requirements. All paid tax return preparers will still have to obtain their PTIN each year.
If you plan to, or have already become an RTRP, I would recommend that you voluntarily take the 15 hours of continuing education each year. If the IRS does obtain the authority to regulate unenrolled tax preparers (which I believe is the likely outcome), you will be ready and up-to-date on the latest tax laws.

Here at Thomson Reuters, we have created courses, webinars, and a subscription package designed specifically to meet RTRP regulations. Regardless of the outcome of this ruling, we are happy to have developed products that are customized specifically for tax return preparers who need clear and succinct update training to meet the needs of their clients each tax season.

I think the IRS will probably seek congressional statutory authority to regulate RTRPs; however, with Congress’s lack of ability to pass any meaningful legislation it may take a very long time. What do you think?

THE AMERICAN TAXPAYER RELIEF ACT OF 2012 --SO WHERE’S THE RELIEF?

On January 9, 1984 a Wendy’s TV commercial first aired touting their hamburgers as having more meat than similar competitor’s burger. Three elderly ladies stand at the pickup window of one of the competitors looking at a very large hamburger. The first lady keeps saying over and over “It certainly is a big bun.” They remove the top half of the bun to disclose a very small meat patty. Finally the shortest member of the group, a woman who could barely see over the counter, asks, “Where’s the beef?” I think we should ask Congress, “Where’s the relief?”

I don’t see how they can call a piece of legislation, “The American Tax Relief Act of 2012” (ATRA) when the Act did not extend the 2% payroll tax reduction allowing the rate to increase back to its previous level of 6.2% of wages. By not sustaining the reduced rate they have in fact increased the taxes of every working American by 2%.


Pork Provisions

It has been estimated that ATRA includes some $70 billion in “Pork Barrel” spending. Congress’s addiction to pork has given us both new and increased deductions that will add to the deficit instead of reducing it. Some of my favorites include:


• Increased rebate amounts to Puerto Rico and the Virgin Islands of a tax on rum imported into the US. Estimated costs $222 million.

• Quicker write off of improvements by motorsport race tracks (NASCAR). Estimate costs $78 million.

• Tax breaks for TV and movie producers that allow them to more quickly write off expenses. Estimated costs $248 million.

• Tax credits of up to $2,500 for purchasing electric powered motorcycles. Estimated costs $7 million.

Here are some of the more significant provisions included in the bill:

Alternative Minimum Tax

Probably one of the better things included in the legislation was to make permanent the Alternative Minimum Tax (AMT) threshold and indexing it to inflation. The new threshold amount is $78,750 and $50,600 for married and single respectively.

Capital Gains and Dividends

The current maximum tax rate of 15% on net capital gains was extended permanently at 15% except for individuals earning $450K for married filing jointly and $400K for aingle filers. For these individual the rate increases to 20%.

Estate, Gift and Generation-skipping Tax

The tax exemption for the estate, gift, and generation-skipping tax was permanently extended at $5 million per person and indexed to inflation; however, the top rate was increased to 40%.

Individual Income Tax Rates

Current individual income tax rates (10% - 35%) were permanently extended, except for those individuals making $400K or more and married joint filers making $450K or more. For these taxpayers the top tax rate is increased to 39.6% .

Personal Exemption and Itemized Deductions Limitations

The personal exemption phase-out and the itemized deductions phase-out were repealed by the Act except for taxpayers with adjusted gross income of $300K for married filing jointly, $275K for head of household, and $250K for single.

It appears that ATRA has at least put a Band Aid on the budget but has done nothing to address the long term issue of deficit spending. By trying to ignore the problem they have been successful in taking a set of complex rules and regulations (Internal Revenue Code) and made them almost incomprehensible.

What do you think?

Special Studies on the American Taxpayer Relief Act Now Available

Thomson Reuters is pleased to offer five Special Studies on the American Taxpayer Relief Act, the new tax law recently signed by President Obama.

• 2012 Taxpayer Relief Act Protects Key Individual Tax Breaks
• Business Tax Breaks Retroactively Reinstated and Extended by the 2012 Taxpayer Relief Act
• Individual Tax Breaks Retroactively Reinstated and Extended by the 2012 Taxpayer Relief Act
• Estate and Gift Tax Relief in the 2012 Taxpayer Relief Act
• Energy-Related Tax Provisions Extended by 2012 Taxpayer Relief Act

 To receive a free copy of the above special studies visit this download page.