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