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Trump-appointed judge to hear suit over president’s taxes

By Andrew Harris and Bob Van Voris


A judge appointed by Donald Trump has been assigned to a lawsuit by congressional Democrats seeking access to the president’s tax returns.


The House Ways and Means Committee sued the Treasury Department and the Internal Revenue Service on Tuesday after they rejected its requests for the past six years of Trump’s personal and business returns. It was Congress’s latest effort to wield oversight over the executive branch. The Trump administration has rejected or ignored a number of subpoenas since Democrats took back the House in January.


The federal judge assigned to the case, Trevor McFadden in Washington, last month rejected a request by House Democrats for an order blocking the president’s plan to pay for construction of his southern U.S. border wall with about $6.1 billion Congress had allocated for other purposes, saying he lacked jurisdiction to hear the case. His ruling is being appealed.


McFadden, 41, is a former Fairfax County, Virginia, police officer and a graduate of Wheaton College in Illinois. He got his law degree from the University of Virginia in 2006 and clerked for a judge on the federal appeals court in St. Louis. He worked for the Justice Department and as a lawyer in private practice before taking the bench in October 2017.


The House lawsuit over the president’s tax returns claimed the administration had “mounted an extraordinary attack on the authority of Congress to obtain information needed to conduct oversight of Treasury, the IRS, and the tax laws on behalf of the American people who participate in the nation’s voluntary tax system.”


The suit followed Treasury Secretary Steven Mnuchin’s rejections of a written request and then a subpoena for the information. House Ways and Means Chairman Richard Neal has sought the records since April, arguing that his committee needs them to see whether the IRS is following its practice of auditing the president annually.


The White House on Tuesday called the suit a “danger to democracy,” saying that “the only thing more political than the committee’s crusade for the president’s tax returns is its sham lawsuit.”


The case is Committee on Ways and Means v. U.S. Department of the Treasury, 19-cv-1974, U.S. District Court, District of Columbia (Washington).




4 crypto trends for the next 5 years

By Alon Muroch


Not long ago, only a handful of accountants dealt in cryptocurrency. Now, just a few years later, every major financial news outlet dedicates a portion of its coverage to crypto. Times have changed quickly, so what will the crypto accounting industry look like in five years and beyond?

Consider the following four trends in crypto accounting and how they will affect CPAs.

1. Increased automation

As cryptocurrencies further infiltrate the public consciousness, traditional accounting services will automate more of their work to keep up with the increased workload. Spreadsheets work well enough for fiat transactions, but in the volatile crypto environment, static tools can’t effectively serve anyone with a serious investment in alternative currencies.

Average consumers today can do their taxes online through services like TurboTax and H&R Block. Businesses and complex individual situations require personalized care, but standard programs can handle the load for most people. Tax programs don’t need to offer advanced functionality just yet — a few equations on the back end do a fine job.

But cryptocurrencies make things more complicated. Accountants need automated tools to track increased crypto complexity, like cost basis. Without smarter software, experts in the financial services industry won’t be able to keep up with higher sophistication at scale. Tax software providers will eventually offer new and highly automated services for crypto investors, and consumers will pay for those services using their crypto investments.


AI accountants

Accounting experts will use smarter tools to help their corporate clients and major investors make better decisions. But the public won't need real accountants for their simple crypto investments; they’ll simply turn to artificial intelligence tools that minimize human interaction in most accounting scenarios.

The future will see consumers interact with intelligent AI, machine learning, and bots capable of natural language processing. Challenging concepts like crypto cost basis, which can confuse even the sharpest accountants, pose little threat to intelligent software. Accountants will still have a place in the world, but their duties will evolve drastically as crypto demands bring widespread change in the financial industry.

Not everyone will feel comfortable doing taxes through AI. Accountants will need to lean on automated tools of their own to keep pace, but enterprise clients, heavy investors, and people suspicious of advanced tech will continue to prefer the human touch. With more money going toward nicer tools and less money going toward human intermediaries, accountants must specialize and adapt to stay relevant.


3. Knowledge enrichment

Schools and universities will soon offer programs and specialty courses to educate future accountants, bookkeepers, and CPAs on the intricacies of crypto. Few schools today offer such services, but the more prominent cryptocurrencies become, the greater the need will be for new accountants to understand the rules of digital currency.

Some businesses already offer services tocertify accountants as crypto tax experts, but schools will remain the top trainers in the accounting world. By educating students before they begin their careers, universities can prepare graduates to operate effectively in an industry with broad new responsibilities and expectations. Businesses and crypto organizations will need new accountants who understand their evolving needs.

For accountants already out of school, options for continuing education will evolve from useful to essential. More crypto trading means more crypto investors and crypto companies. Those entities need experts who understand the cryptocurrency landscape. If experienced accountants fail to adapt, fresh faces will gladly take the business.


4. Updated regulatory standards

Where crypto regulation used to be nonexistent, legislators have actually made some limited progress. The SEC now has more oversight to shut down illicit initial coin offerings (ICOs), and the IRS clarified that cryptocurrencies are property, not currency — at least for now.

But the more that crypto changes, the more regulations will change with it. Every business that deals with cryptocurrency will encounter newer, more robust laws in the years to come. Soon every company and project that deals with crypto will need an accountant (or accounting service) with crypto experience to help navigate the unknown.

As new laws get passed, businesses will invest more heavily in smarter crypto accounting solutions. Artificial intelligence and machine learning will do the heavy lifting while human accountants interpret that data to help executives make smarter business decisions. More technology startups will emerge to cater to this growing audience. Before long, crypto accounting will become an industry unto itself.

These changes may seem like far-off concerns for another year, but crypto accounting — like cryptocurrencies themselves — moves quickly. Expectations and the tools to meet them become more complex and sophisticated each day. Accountants must stay vigilant to keep up with the times, or they risk losing ground to a new generation of crypto-savvy competitors.




Deloitte fined $5.4M over Serco Group audit failings

By Hugo Miller


Deloitte LLP was fined 4.3 million pounds ($5.4 million) for its failure to properly audit the accounts of a unit of Serco Group Plc in the latest case of a Big Four firm being sanctioned for its accounting shortcomings.


Deloitte will also pay 300,000 pounds toward the costs of the investigation and has arranged to send all its audit staff on training program to improve behavior related to its “misconduct,” the U.K.’s Financial Reporting Council said.


Deloitte and audit engagement partner Helen George, who was fined 97,500 pounds, “failed to act in accordance with the fundamental principle of professional competence and due care,” the FRC said in a statement Thursday. The fines for Deloitte and George were both were reduced after their admission of misconduct.


Serco Group Plc agreed to pay 19.2 million pounds this week to settle a six-year fraud probe into false accounting, that dates back to 2013 when U.K. regulators began looking into how its Serco Geografix unit overcharged for electronic tagging services of criminals, including some who had died.


Deloitte’s fine comes just weeks after PricewaterhouseCoopers was fined 4.55 million pounds over its failings in its handling of technology firm Redcentric Plc. The accumulating fines have fueled scrutiny of the dominance of Big Four, which also include KPMG and EY, and has led the Competition and Markets Authority to call for a split of their operations amid allegations of conflicts of interest




Practitioners eye preparer regulation legislation

By Roger Russell


Bills to allow the IRS to regulate tax preparers continue to be introduced, only to falter on the way to becoming law. Maybe H.R. 3330, the Taxpayer Protection and Preparer Proficiency Act of 2019, will be more successful — or at least Neil Fishman, national president of the National Conference of CPA Practitioners, hopes so.


The bill was introduced on June 18, 2019, by Congressman Jimmy Panetta, D-California, and Congressman Ted Yoho, R-Florida. It would allow the IRS to require minimum standards for paid tax preparers. Senate Finance Committee Ranking Member Ron Wyden, D-Oregon, and Senator Ben Cardin, D-Maryland, have introduced a companion bill, S. 1192, in the Senate. NCCPAP supports both bills.


Although the Senate bill currently has been sponsored only by Democrats, Fishman said he hopes it will eventually pick up bipartisan support, as has the House bill. “I like to think that members of Congress will realize that this bill will support American taxpayers,” he said. “The most important document that Americans have prepared each year is their tax return, and you would think that if they engage someone to prepare it, that person would be competent and up to date with changes in the tax law.”


“We consider this to be important legislation because there are many tax preparers who are neither licensed nor regulated by any government authority, state or federal,” Fishman said. “These individuals lack the requirements to keep up with changes in tax law and the knowledge to put tax legislation to work for the taxpayer’s advantage. CPAs, attorneys, and Enrolled Agents are all regulated — either by the IRS, state boards, or a state department of education. If CPAs, attorneys or Enrolled Agents were to commit egregious acts, taxpayers can file a complaint with these regulatory bodies, who can then impose disciplinary actions. For those not credentialed as such, there is no redress for the taxpayer.”


  • It restores the ability of Treasury and the IRS to set federal standards of tax practice for all paid return preparers.
  • It requires that certain preparers meet the following minimum competency requirements, by obtaining a preparer tax identification number; satisfying annual examination and annual continuing education requirements; and completing a background check.
  • It gives the Treasury the authority to require preparers to include PTINs on returns, and to rescind a PTIN if a preparer is incompetent or disreputable.
  • It requires a GAO study on the sharing of information between the Treasury Department and state regarding PTINs issued to paid return preparers and preparer minimum standards.


NCCPAP supports the legislation because the absence of standard leaves many taxpayers vulnerable, according to Fishman.


“When one has to pay tax, the liability should be no greater than it has to be,” he said. “There are a lot of things in the Tax Code that are black and white, but depending on the situation, many are the proverbial shades of grey.”


For those concerned that an additional certification might lessen the competitive edge of those already a CPA, attorney or EA, Fishman said, “There’s plenty of work for all of us. And don’t you think taxpayers deserve to know that the person they’re using is competent? A barbershop and a beauty parlor are more regulated by states than tax preparers.”




House Democrats press case for seeing Trump’s business records from accounting firm

By Andrew Harris


U.S. lawmakers have the right to see President Donald Trump’s personal business records held by his accounting firm, attorneys for a Democrat-led House committee told a U.S. appeals court panel.


“The Oversight Committee is investigating issues of national importance concerning ethics and conflicts of interest across the Executive Branch,” the committee’s lawyers said in papers filed with the Washington-based appellate court on Monday. “Mr. Trump and his companies have continually engaged in stonewalling intended to obstruct and undermine these inquiries.”


The argument is intended to rebut Trump’s contention the committee isn’t entitled to the documents, dating back to 2011, because they’re not sought for a legitimate legislative purpose. A lower court judge rejected that argument in May, prompting the president’s private attorneys to appeal.


A three-judge panel composed of two Democratic presidential appointees, David Tatel and Patricia Millett, and one Trump-nominee, Neomi Rao, is scheduled to take up the case on July 12.


The Oversight committee’s demand that Mazars USA LLP turn over Trump’s business records parallels a separate House Financial Services Committee request for records from Deutsche Bank AG and Capital One Financial Corp. The president has appealed a New York federal judge’s refusal to block those subpoenas. A hearing hasn’t been scheduled in that case.


House Ways and Means Committee Chairman Richard Neal has also said he will likely sue to compel the U.S. Treasury Department to produce Trump’s tax returns for the past six years.


The cases are Trump v. Mazars USA LLP, 19-5142, U.S. Court of Appeals, District of Columbia Circuit (Washington) and Trump v. Deutsche Bank AG, 19-1540, U.S. Court of Appeals, Second Circuit (New York).




Corporate tax execs have trouble keeping up with tax changes

By Michael Cohn


The biggest tax challenge for a majority of corporate tax executives is staying up to date with all the changes associated with the 2017 Tax Cuts and Jobs Act, according to a new survey.


The survey, by Bloomberg Tax & Accounting, polled 337 corporate tax executives and found that 57 percent of them indicated their biggest tax challenge is staying up to date with the TCJA changes.


Senior tax leaders see an increasing role for the tax department in business strategy. An 83 percent majority believe the tax function should support major transactions, while only six in 10 think they are contributing in that area today. Sixty-three percent believe tax departments should support company-wide efforts to manage risk, but only 36 percent reported that they are doing so today.


Technology is a big theme in the survey. Implementing new technology or making better use of existing technology was cited by 45 percent of the tax departments as one of their biggest challenges, with a majority of larger tax departments with over 10 staff members more likely to consider it a top challenge.


Lack of effective technology is prompting corporate tax departments to rely on manual spreadsheets and processes to work around gaps in the various systems used to compute tax provision estimates for financial statements. Forty-nine percent of the survey respondents reported relying on spreadsheets or being challenged by technology gaps to automate tax provision calculations, while 42 percent indicated they lack timely access to data that drives calculations. The survey found that 87 percent of the tax professionals polled anticipate more automation in the tax function.


The skills needed for a senior tax professional are changing. Recruiting and retaining tax employees is a challenge, with 69 percent of the tax executives polled indicating that proficiency in data analytics and modeling will be a top requirement in two years, up from 46 percent who believe this skill is required today. Three out of four respondents said proficiency in technology systems for finance and tax will be a top requirement of tax leaders in two years, as opposed to 61 percent of survey respondents who think this is a required skill today. Identifying talented tax professionals is also a challenge with 56 percent of the survey respondents reporting they have difficulty recruiting and retaining talented tax professionals.


“The results of our annual survey provides valuable insights into the challenges and opportunities corporate tax leaders are facing as they make strategic decisions tied to people, process, and technology,” said Bloomberg Tax president Lisa Fitzpatrick. “This provides them with a basis for how their peers are viewing the future of the tax department within their organizations and provides the pulse on current state of corporate tax departments. Bloomberg Tax is committed to providing the intelligence and tools needed to not only stay on top of changes — from tax reform to BEPS to IRC conformity — but fully understand their implications for different types of businesses operating in different jurisdictions.”


The survey was presented at last week’s Bloomberg Tax Leadership Forum. “The top two challenges were current awareness along the lines of legislative tracking and keeping up with tax reform,” said Benjamin Jung, director of federal tax at Bloomberg Tax. “In reality, I think that’s a bit broader than the tax legislation. The other top challenge identified in the survey was overall compliance. The number one reason for that being identified was the increase in complexity, and the increase in the workload, that give rise to a more articulated need for hiring and retaining talented tax professionals.”




Democrats eye the next repeal and replace: Trump’s tax law

By Laura Davison


Democratic presidential front-runners largely agree on their first tax priority: Scrap President Donald Trump’s tax overhaul and institute new levies to pay for social programs to benefit the middle class.


But like the Republican struggles to repeal and replace President Barack Obama’s Affordable Care Act in 2017, there are lots of plans and little consensus on how specifically to go about it. And even if they could roll back all or part of the $1.5 trillion tax law, some of the candidates would still be short of the extra revenue needed to cover their expensive proposals.


Senator Bernie Sanders of Vermont — who is promising to pursue universal health care and free college — bluntly acknowledged that middle-class Americans will see their tax bills rise, but he promised an increase in the government services they would receive.


“Yes, they will pay more in taxes, but less in health care for what they get,’’ he said Thursday night in Miami during the second round of the first Democratic presidential debates.


Rolling back the Trump’s tax overhaul, which cut tax rates for individuals and corporations, is low-hanging political fruit for Democrats. But they differ on how they want to spend the revenue that a repeal would raise.

Some are also skittish about explaining how they would generate the trillions more needed to pay for ambitious policies like expanding health care, increasing access to child care and reducing student loan debt.


Former Vice President Joe Biden and Senator Kamala Harris of California both said during the debate they would make eliminating the Republican tax law a priority.


Harris has said her plan would grant tax credits to middle-income earners. The proposal, which would provide tax credits as high as $6,000 for a family annually, would cost about $3 trillion, about twice the cost of the Trump tax cut. Biden said he wants to give an economic boost to the middle class, but he hasn’t specified how to do that or how he would pay for it.


Sanders, along with Senator Elizabeth Warren of Massachusetts, has leaned into the cost of new social programs by proposing new taxes on Wall Street and wealthy individuals to fund the additional benefits. Even with higher taxes — including those on the middle class — people would still come out ahead, Sanders said.


Warren has promoted an annual 2 percent wealth tax on those with fortunes of at least $50 million, a levy she estimates would raise about $2.75 trillion. Sanders is proposing a tax on Wall Street trades that would include a 0.5 percent tax on stock transactions, a 0.1 percent tax on bond trades and a .005 percent tax on derivatives transactions to pay off student debt and finance tuition at public colleges and universities.


But other Democrats — including Harris and Biden — have been shy about embracing the specifics of new taxes. Former Texas Congressman Beto O’Rourke has been vague about how to pay for his plans, including a $5 trillion proposal to combat climate change with the goal of achieving net-zero emissions in the U.S. by 2050.

O’Rourke has said he wants to make the corporations and wealthy “pay their fair share” and “end the tens of billions of dollars of tax breaks currently given to fossil fuel companies.”


During the first night of the debate he refused to answer a question about whether he supported a 70 percent top individual rate, an idea that has been gaining traction among progressives in Congress.


He was pressed in an interview with MSNBC Thursday if he would support raising the rate to 70 percent. His response: “No, I’m not.”




IRS issues proposed regs on college endowment income

By Michael Cohn


The Internal Revenue Service proposed regulations Friday for the new 1.4 percent excise tax on the net investment income of certain private colleges and universities who are now facing taxes on their endowments under the Tax Cuts and Jobs Act.


The proposed regulations involve an aspect of the 2017 tax overhaul that provoked particular consternation in the academic world. The IRS’s proposed regulations define some of the terms necessary for educational institutions to determine whether the section 4968 excise tax applies to them.


The excise tax applies to any private college or university with at least 500 full-time tuition-paying students (more than half of whom are in the U.S.) and that has assets other than those used in its charitable activities worth at least $500,000 per student. An estimated 40 or fewer institutions are affected by the new tax rules, but they include some prestigious schools, including Ivy League institutions.


For the affected educational institutions, the IRS’s new guidance clarifies how the schools should determine net investment income, including how to include the net investment income of related organizations and how to determine a college or university’s basis in property.


The proposed regulations include the interim guidance provided last year in Notice 2018-55, that for property held by an institution at the end of 2017, generally permits the educational institution to use the property’s fair market value at the end of 2017 as its basis for calculating the tax on any resulting gain.




White House considers capital gains tax break that would benefit wealthy

By Saleha Mohsin


The White House is developing a plan to cut taxes by indexing capital gains to inflation, according to people familiar with the matter, in a move that would largely benefit the wealthy and may be done in a way that bypasses Congress.


Consensus is growing among White House officials to advance the proposal soon, the people said, to ensure the benefit takes effect before President Donald Trump faces re-election in 2020.


Revamping capital gains taxes through a rule or executive order likely would face legal challenges, a concern that reportedly prompted former President George H.W. Bush’s administration to drop a similar plan.


A White House spokesman didn’t immediately respond to a request for comment.

Indexing capital gains would slash tax bills for investors when selling assets such as stock or real estate by adjusting the original purchase price so no tax is paid on appreciation tied to inflation.


Wealthiest Benefit

Most of the benefits would go to high-income households, with the top 1 percent receiving 86 percent of the benefit, according to estimates in 2018 by the Penn Wharton Budget Model. The policy could reduce tax revenue by $102 billion over a decade, the model found.


The change in capital gains tax calculation would have little chance of passing Congress, which is why the White House is considering making the change on its own. The House would likely oppose legislation to make the change as many Democrats have raised objections to the GOP’s 2017 tax cuts, saying they disproportionately helped the wealthy.


The work is largely taking place at the White House because the Treasury Department has been slow-walking the process, over concerns that the change could be challenged on legal grounds and that it might require Congress to rewrite the law, the people said.


But Trump has told confidants recently that he remains deeply invested in making the change, they said. Trump last year said in an interview with Bloomberg News that he was considering indexing capital gains to inflation.


Officials inside the White House remain split over whether Trump should attempt to push it through via executive order and risk a legal challenge.


Treasury Secretary Steven Mnuchin said last year that he was studying whether the administration could sidestep Congress and issue a rule to allow capital gains to be indexed to inflation.


A Treasury Department spokesman declined to comment.


Legal Opinion

The White House hasn’t asked the Justice Department for a formal legal opinion on the matter, the people familiar with the matter said.


The Bush White House reportedly dropped its capital gains plan amid disagreement among senior officials over whether the plan was legal.


The change has been a longtime goal of Trump’s top economic adviser, Larry Kudlow, who has said the policy would spur job creation and economic growth because people wouldn’t be taxed on what he’s called “phantom income.”


“It would be a giant economic stimulus for the economy,” said Stephen Moore, a former Trump campaign adviser and a contributor to FreedomWorks, a Washington-based conservative advocacy group. “It would help the stock market and it could unleash hundreds of billions of dollars of new capital for investment.”


Moore dismissed criticism that the capital gains changes would amount to a tax cut for the wealthy, saying a majority of Americans own stock.


The inflation adjustment would amount to a several percentage point tax cut for investors, depending on the type of asset and how long it’s held, according to 2018 estimates from the non-partisan Congressional Research Service.


Corporate stock with dividends held for 10 years would be currently subject to an effective tax rate of 24.3 percent. That same holding indexed to inflation would be subject to a 21.4 percent tax rate, CRS said.

— With assistance from Shannon Pettypiece and Laura Davison




Can I Expense That? LOL: The Most Absurd Expense Report Items



Finance departments continually develop rigorous expense reporting guidelines, but that hasn't stemmed the flow of eyebrow-raising requests by some employees, new research suggests. In a new survey, 56% of CFOs cited an increase in the number of inappropriate reimbursement submissions over the last three years. Some of the more egregious infractions included a cow, Super Bowl tickets and invoices for another company.

CFOs were asked, "Have you seen inappropriate expense report requests increase or decrease in the past three years?" Their responses:


  • Significantly increase: 27%
  • Somewhat increase: 29%
  • No change: 29%
  • Somewhat decrease: 11%
  • Significantly decrease: 4%


CFOs also shared additional examples of audacious expense report requests:

  • Trip to Italy
  • Bear rug
  • Pogo stick
  • Taxes
  • Moving a horse trailer

Expenditures for children and pets, like the following, were commonly flagged:

  • Daycare
  • Pet sitting
  • Kids' clothing
  • Cat litter
  • Toys

Household items and expenses were also popular reimbursement submissions:

  • Chandeliers
  • Tractor
  • Tree
  • Plunger
  • Bed bug removal

There were even a few requests that verged on the incredulous:

  • Chicken statue with a top hat
  • Yacht
  • Pearls
  • Motorcycle
  • Lamborghini


"Some of the more absurd expense report submissions may seem laughable, but they can be an expensive problem for businesses," said Tim Hird, an executive vice president with Robert Half, which conducted the survey. "Companies must have effective review systems, policies and processes in place, or they risk losses in profits and employee productivity."


Additional research also found most companies utilize technology-based solutions in their expense-reporting process: 44% use internally developed software and 41% employ third-party systems. Overall, only 14% of organizations use manual processes, though this jumps to 31% for firms with 20 to 49 employees.


Hird added that implementing new technology can help streamline the expense-reporting process, but communication to staff is essential. "Do everything possible to make sure there is no ambiguity among employees about what constitutes a valid business expense. Regularly share your policies and include examples of past tricky situations to clarify gray areas."


Robert Half Management Resources offers managers three ways to address and reduce inappropriate expense report submissions:

  1. Overcommunicate guidelines. Make company policy easily accessible and provide regular reminders through the employee newsletter, company intranet or staff email.
  2. Discuss expense report issues with employees. Improper submissions may be the result of staff members' lapse in judgment or attempt to push boundaries. Whatever the reason, follow up with employees so that mistakes can be avoided in the future.
  3. Review new requests carefully. Keep an eye on future submissions when a significant problem has occurred. If you spot a red flag, address it immediately and reinforce company policies.




IRS faces hiring shortages amid workforce attrition

By Michael Cohn


Officials at the Internal Revenue Service are looking to hire more employees to handle tax enforcement, compliance and administration of the tax code, even as more of the IRS’s older workers retire and leave the agency, particularly after the month-long government shutdown last December and January.


A series of top IRS officials made a pitch to tax practitioners that they should consider joining the agency at New York University’s Tax Controversy Forum last week.


“For those of you who have always wondered what it might be like to work at the Internal Revenue Service if you’ve not been there, come on board,” said IRS Commissioner Chuck Rettig. “We're hiring across the board.” He noted that the IRS Chief Counsel’s office, the Large Business and International division, the Small Business/Self-Employed, Criminal Investigation and information technology units are all hiring.


“It can be a tremendous experience,” Rettig added. “It can be an experience that you find tremendously rewarding, and I think it's an experience that you should reach out for.”


IRS Chief Counsel Michael Desmond acknowledged that recruitment of staff is one of his highest priorities. “I think one of the biggest challenges, and this isn’t unique to Chief Counsel — it’s shared on the commissioner’s side as well — is legacy planning, both at the leadership level and also for just bringing in younger attorneys,” he said. “We’ve had a pause in hiring for five or 10 years now, and that’s created a number of problems, particularly in the leadership pipeline. We’ve got some excellent young lawyers who have come in, particularly in the last year under the TCJA [Tax Cuts and Jobs Act], and we’ve been able to do a little bit of hiring for the last five or 10 years, but it’s by no means filling the attrition that we’ve had.”


Desmond said he signs retirement congratulatory letters multiple times a week and goes to retirement parties. “It’s nice to see people like Fran Regan, who is leaving the Manhattan office after 38 years, but those are very big shoes to fill,” he added. “We’ve got about 200 new lawyers coming in this year, but we’ve also got about 200 leaving. It’s better than we’ve had in the last eight or 10 years, but it’s certainly going to present a challenge. Bringing all those new and young and even lateral attorneys on board and getting them up to speed and getting them up to the level of performance that somebody with 38 years of experience is going to have is going to be a challenge for us, but we acknowledge it and we’re facing it.”


One of the other major priorities is helping develop guidance for the Tax Cuts and Jobs Act. Desmond said there has been a steep learning curve, though, in developing guidance for brand new provisions such as FDII (foreign derived intangible income) and GILTI (global intangible low-taxed income).


Douglas O’Donnell, commissioner of the IRS’s Large Business and International division, said the LB&I group is hiring hundreds more people, while also losing hundreds to retirement. “From 2010 or so, we’re down about 40 percent, from 7,100 to 4,300,” he said. “That limits what we can do, and that’s a significant drop. We’ve tried to be very thoughtful in how we’ve deployed our personnel and what type of work we’re going to do. We did get authority this year to hire 500-plus people new to the division, but we’re not growing by 500. We’re hiring 550, but we’ve been losing about 7 percent of our workforce a year to retirement, so the net increase in the division is roughly 200 to 250. We’re going to end the year with more people than we began with for the first time since 2011. That’s an accomplishment, but we still have challenges with people.”


Among the new hires are revenue agents, appraisers and computer engineers, he noted. The LB&I division has been leveraging technology such as data analytics to make up for shortfalls in personnel and now has the ability to look across an entire filing population with its new enforcement and examination campaigns.


Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed division, said her group is hiring thousands more employees. “We’re extremely excited about the hiring opportunities,’” she said. “We are hiring about 3,200 people, not all for the field. We’re going to hire about 950 exam folks, revenue agents and tax compliance officers, and about 500 revenue officers. Our first class started June 10 for the revenue officers. The lapse in funding slowed us down a little bit with our hiring. We had hoped to be well underway. We start to train the first wave of revenue agents in July, so we’re extremely excited about that. We still have our jobs open on USAJobs, so if you have any friends or family, we are a great organization.”


Murphy recently visited Las Vegas to explain tax compliance to a group of casino employees. She noted that the SB/SE division has been working on tax compliance for cryptocurrency and for Uber and Lyft workers. The IRS Criminal Investigation unit accepts about 90 percent of the cases they refer.


IRS Collection Director Paul Mamo said his group is fighting resource shrinkage by using robotic process automation technology to target egregious tax delinquents. The Collection unit has also introduced a new automated chat function to further leverage technology. “Everyone’s touched on the hiring,” he said. “It’s a very cyclical process. The revenue officers, for example, who many of you probably face off with each and every day, right now, as we stand here today, we’re just over 2,000. In fact, we have a group of folks in Atlanta being trained this week. As Doug [O’Donnell] described, it’s the same idea we have. We’re hopefully going to bring in somewhere in the range of 500 or 600 revenue officers this year, but again we’re churning out a lot. We’re churning out about 250, so that attrition rate is a little bit higher for us. But we want folks to have a career path, we want folks to grow. That’s the process we’re in now. For the first time in eight years, we’re going to see an increase in revenue officers when we close this fiscal year. We’re excited to see that.”


IRS Criminal Investigation chief Don Fort said his unit has lost about 1,000 agents in recent years to retirement and only hired about 250 replacements. In 1991, when he joined the IRS CI unit, there were about 2,900 agents and it’s now down to just over 2,000 last year.


“It’s a depressing number,” he said. “The high-water mark for CI was in 1996 or 1997, when we had about 3,300 agents. So it’s down considerably. I wish I could snap my fingers and hire agents, but the process doesn’t work that way. We don’t control the budget, and even within the IRS, I don’t have control over hiring because every part of the IRS needs resources desperately, so there are trade-offs everywhere you go.”


However, the IRS is hiring more agents for the Criminal Investigation unit this year and next year. “By the time this fiscal year is over, we will have hired probably about 150 agents,” said Fort. “That sounds like a decent number compared to 2,000 agents, but you have to recognize that we also lost about 140 or 150 to retirement every single year. This year, we’re treading water, basically staying about the same. Next year, we’ve got tentative approval for about 10 classes, which means anywhere from about 200 to 250 agents, so we’ll finally start to see an increase. That’s great news.”


To help with priorities like payroll and employment tax fraud, the IRS is using technology like data analytics. Still, the new hiring brings another set of problems. “Some of these offices haven’t had new employees in years, so having new energetic agents come in really breathes life into offices, but it comes with significant challenges,” said Fort. “When you have that many classes and bring that many new agents on, it means that we have to take some experienced agents offline to help train them. There’s a lot of competition for getting the classes and our agents go to federal law enforcement training centers in Georgia. There are about 100 federal agents who compete for space there, so getting the classes is a challenge to begin with. But then staffing up with instructors takes time and effort. Then, once they get back in the field, one of the strongest parts of our training program is on-the-job instructors. These are seasoned agents that work with the junior agents to help them go on interviews and teach them how to do the job. From the time that we hire an agent to the time that they’re likely to recommend a case to the Department of Justice is anywhere from two to three years."


Training new agents is a priority, even if it means taking previous investigation time away from older employees.


"We have to recognize that we have to make that commitment to the future, but we’re taking some of our most experienced agents offline to help get the next generation of agents up and running, so there’s definitely challenges there," Fort added. "If you look at the last six or seven years, we’ve lost about 1,000 agents to retirement, and only 250 coming in. Those 1,000 agents walking out the door are your most experienced agents, and you’ve got no new agents coming to pass along that knowledge. It does present some challenges for sure.”




The new W-4: More trouble than it’s worth?

By Roger Russell


The newly redesigned draft Form W-4, “Employee’s Withholding Allowance Certificate,” was released on May 31, 2019. The IRS expects to release a near-final draft of the 2020 Form W-4 in mid-to-late July, with a final version of the form slated to be released in November.


In a comment letter sent June 13, 2019, Roger Harris expressed concern that the new requirements placed on employers, particularly small employers doing their own payroll, would be “exceptionally burdensome.”


“We urge you to reconsider the new forms and procedures,” stated Harris, the president of Padgett Business Services and a past chair of the IRS Advisory Committee. “We suggest moving back toward a system that allows employees to do relatively simple calculations and to provide the employer with an allowance number. That number, along with the employee’s gross pay, will allow the employer to do a much simpler calculation of withholding.”


“For as long as there has been withholding by the employer, the amount paid to the employee was used by most small businesses to calculate federal and state withholding,” Harris stated. “Under the new withholding methods, this is no longer the case, as the employer must modify the amount paid before using the tables. Also, because many employees’ earnings change every pay period, the calculation is required each pay period, not just on an annual basis."


Moreover, Harris observed, since employees have the option of using the old or the new W-4, it would require the employer to maintain two methods of calculating withholding.


“We anticipate this could discourage the use of the new W-4 because employers do not want to maintain two systems,” he said.


This may result in employers treating more workers as independent contractors to avoid the added burden, he predicted. Or employers may feel they have no choice but to engage the services of a payroll company, which will affect their profitability.


“The most common error will be the calculation of withholding based on earnings, not the adjusted wage amount, which will lead to over-withholding for most employees. There is no method for getting this money back quickly as they will have to wait until they file their personal income tax return to obtain a refund and have use of their money. There is no doubt that such a drastic change requires educating both employers and employees, and at this time there is no effective education plan in place,” he pointed out, citing the need to educate millions of employers that the amount they pay their employees is no longer the amount used to calculate withholding tax.


And unless the states make a corresponding change in their processes, the employer will be faced with a third method for the withholding calculation, he indicated.


“It appears that the IRS recognizes the magnitude of the change, and thereby is allowing the old W-4 to still be used,” Harris wrote. “Unfortunately, the IRS did not update the withholding tables to correspond. If the IRS is going to continue allowing employees to use a W-4 that has allowances, then they should also maintain proper withholding tables based on earnings, as they have done forever. By doing what we suggest, a small employer would only be required to adjust employee earnings for employees using the new W-4. While not completely reducing all the burden, it does allow for a smaller burden for the smallest companies. Perhaps, if necessary, the allowance option could be an option for certain businesses, and only require larger employers with more resources to adopt the new form and process.”


Although all of this was done in the name of accuracy, under the old system an employee could always use the worksheets to improve accuracy, Harris explained. “Given the longstanding use of the old form, most taxpayers accepted the level of accuracy and understood that it was not perfect,” he wrote. “We fear that the new requirements will actually make things worse, rather than better. The IRS should keep the framework of the old system and work to make the withholding tables as accurate as possible. For those taxpayers that want the additional accuracy, the new W-4, along with corresponding employer instructions and education, should be an option, not a requirement.”




We are part of the problem’: Billionaires and heirs demand wealth tax

By Tom Metcalf and Suzanne Woolley


They’re an eclectic bunch — some of the nation’s most privileged heirs alongside entrepreneurs who have made spectacular fortunes in real estate, finance and Silicon Valley. But collectively they’re united on the need to tax more of the richest Americans’ assets.


George Soros, heiresses to the Pritzker fortune, Abigail Disney and Facebook Inc. co-founder Chris Hughes are among those calling for a wealth tax to help address income inequality and provide funding for climate change and public health initiatives.


“We are writing to call on all candidates for President, whether they are Republicans or Democrats, to support a moderate wealth tax on the fortunes of the richest one-tenth of the richest 1% of Americans — on us,” according to a letter signed by 19 individuals — one anonymously — and posted online Monday. “The next dollar of new tax revenue should come from the most financially fortunate, not from middle-income and lower-income Americans.”


One of the youngest signers, 35-year-old Liesel Pritzker Simmons, whose extended family is worth more than $33 billion, framed the situation simply: “We are part of the problem, so tax us.”


The signers “thought it was important for people who would be affected by a wealth tax to come out publicly and say we want this, this is OK, this leads toward the America we want to see,” she said in a phone interview.


In the short term, the group hopes the letter “sparks a debate with the 2020 candidates" and that a wealth tax, or alternatives to one, are discussed during the upcoming Presidential debates, said Pritzker Simmons, who supports Elizabeth Warren for the Democratic nomination. “These are conversations that have been had in the past, but now the time is right,” she said.


Warren, a senator from Massachusetts, as well as fellow Democratic presidential hopefuls Pete Buttigieg and Beto O’Rourke support the idea, according to the letter. Warren has proposed a 2% tax on assets of $50 million or more, and a further 1% on assets over $1 billion. It is estimated to generate nearly $3 trillion in tax revenue over 10 years.


The wealth tax isn’t embraced by all Democrats, though, with some arguing it would be difficult to objectively assess the value of wealth like artwork and jewels or illiquid assets. There are also concerns that such a tax is unconstitutional because the federal government is prohibited from taxing property, only income.


“If your main argument is that it’s going to be hard, that’s a lazy argument,” Pritzker Simmons said. “We can figure it out.”


European countries have experienced mixed results with a wealth tax. Of 15 nations in the Organization for Economic Cooperation and Development that had them in 1995, only four — Switzerland, Belgium, Norway and Spain — still do. France, Sweden and Germany are among those that backed away from the levy because of the difficulties implementing them.


Some of those signing the letter have already expressed concerns about rising inequality. Hughes has evangelized for higher taxes on the rich in his book “Fair Shot.” Disney, whose grandfather and great-uncle founded Walt Disney Co., recently called Chief Executive Officer Bob Iger’s $65.6 million compensation package “insane.”


The New York Times reported on the letter earlier Monday.


Another signatory, entrepreneur Nick Hanauer, first warned his “fellow zillionaires” about the country’s growing wealth divide in 2014, writing that “there is no example in human history where wealth accumulated like this and the pitchforks didn’t eventually come out.”


Such inequality has only deepened. Last week, Bernard Arnault joined Jeff Bezos and Bill Gates as the third person with a fortune of at least $100 billion on the Bloomberg Billionaires Index, whose 500 members have a total net worth of $5.5 trillion, up from $4.9 trillion two years ago.


“If we don’t do something like this, what are we doing, just hoarding this wealth in a country that’s falling apart at the seams?” Pritzker Simmons said. “That’s not the America we want to live in.”

— With assistance from Laura Davison




New bill would let same-sex couples claim pre-Windsor refunds

By Michael Cohn


The House Ways and Means Committee unanimously approved a bill last week to allow same-sex couples who married before the Defense of Marriage Act was struck down by the Supreme Court to claim their tax refunds.


H.R. 3299, the Promoting Respect for Individuals’ Dignity and Equality (PRIDE) Act of 2019, was introduced this month on the 50th anniversary of the Stonewall Riots, and would update the Tax Code to allow same-sex couples who married before the Supreme Court struck down DOMA in the landmark 2013 ruling in U.S. v. Windsor, to claim their tax refunds.


For years, same-sex couples in states that recognized legal marriage were denied federal refunds because DOMA did not allow them to file federal taxes jointly. That law was overturned by the Supreme Court’s decision six years ago, but the IRS lacks the authority to override limitations in the Tax Code that limit to three years the period within which a married couple can file jointly after having already filed separate returns. The bill would correct that limitation to permit the IRS to provide refunds to same-sex couples who married in states that recognized same-sex marriage before DOMA was overturned.


The bill was introduced in the House by Rep. Judy Chu, D-California, and Andy Levin, D-Michigan. A companion bill has been introduced in the Senate by Sen. Elizabeth Warren, D-Massachusetts. In addition to H.R. 3294, the Refund Equality Act, the PRIDE Act also includes language from H.R. 1244, the Equal Dignity for Married Taxpayers, which would remove gendered language such as “husband” and “wife” from the Tax Code to accommodate same-sex couples. Instead, tax filings would use terms such as “spouse” and “married couple.”


“I’m so happy that Democrats and Republicans on the committee could come together to unanimously support this common sense measure to recognize that marriage is more than a husband and wife,” Chu said in a statement last Thursday. “Same-sex couples no longer need to feel excluded when filing their taxes.”




Trump's tax cuts could die the hard way: A little at a time

By Laura Davison


Democratic presidential candidates like Joe Biden and Kamala Harris have talked about repealing the GOP’s tax overhaul. Yet a large-scale rollback is unlikely. Instead, two other forces could slowly unravel the law — Democrats currently in power in the House and President Donald Trump’s trade policies.


House Democrats, in a package of tax legislation scheduled to be debated Thursday, proposed rolling back some of the 2017 changes to the estate tax, making it apply to more people sooner. Democrats have also contemplated using small increases to the corporate rate, which the Republican law cut to 21 percent from 35 percent, to pay for their own tax priorities.


Democrats say they would like to use the corporate tax cuts to offset the cost of lowering taxes for the middle class, by expanding the earned income tax credit for low-wage workers, broadening tax credits for families with children, and renewing expired tax breaks for the biodiesel and renewable energy industries. But the legislation they released Tuesday only specified the estate tax changes, and not the corporate rate, as a way to pay for the tax cuts.


The Republican-controlled Senate will reject anything that threatens to diminish their signature legislative achievement, but the House plan is a taste of what could come if the balance of power in Washington shifts after 2020.


Most Democrats are comfortable with a corporate tax rate of at least 28 percent, with some willing to go much higher.


Democrats almost universally agree the 37 percent tax rate on top earners should go back to what it was before the 2017 overhaul — 39.6 percent — and there’s appetite for a much higher top rate on the wealthiest Americans. Some progressives have praised New York Representative Alexandria Ocasio-Cortez for her suggestion to raise the top tax rate to 70 percent for those earning millions.


The biggest threat to the overhaul isn’t a second sweeping measure that wipes out the entire law; rather it is more likely to be rolled back bit-by-bit as Democrats see it as a way to pay for their agenda items such as tax cuts for middle-earners and universal health coverage.


Democrats need to “tie tax changes to what we want to invest in rather than just saying we are going to take it away but not tell you what we are going to do instead,” said Representative Pramila Jayapal, a Washington state Democrat and co-chairman of the House Progressive Caucus. “We have to have our own counter-proposal. It can be rolled out in smaller pieces.”


House Ways and Means Committee Chairman Richard Neal, a Republican who is leading the House’s effort in the tax package to be debated on Thursday, acknowledges it is just an opening bid for the negotiations for this year.


But 2020 Democratic presidential candidates see the 2017 tax law as the piggy bank for their proposals. Biden and former Texas Representative Beto O’Rourke have both released proposals to combat climate change that would be paid for by reversing the tax cuts. Harris has called to roll back the tax cuts for the wealthy to pay for direct tax credits for low-income and middle-earning workers.


“A corporate tax rate hike — of any size — should not be considered a viable option as lawmakers consider ways to fund new legislative proposals,” said Katharine Cooksey, a spokeswoman for the RATE Coalition, a business group that supports the 21 percent rate. “When coupled with the threat of rising state corporate rates, any corporate rate increase at the federal level stands to drive taxes back up to a globally uncompetitive level, which in turn stunts U.S. job creation and wage increases.”


Other economic headwinds, such as Trump’s current and threatened tariffs on nearly all imports from China, could further dim corporate optimism. Representative Andy Barr, a Kentucky Republican, supports extending the expired tax breaks in Neal’s package but said he’s worried that Democrats could roll back much of the economic stimulus in the tax cut bill.


“As trade uncertainty continues to swirl around there, it’s really important we give businesses the long-term certainty to invest,” Barr said.


Tariffs have already begun to cut into some of the gains from the tax cuts. The average household will face an $831 annual burden as a result of the tariffs on Chinese goods, according to a study from the Federal Reserve Bank of New York.


Concern about increasing the tax burden on middle-earners is also problematic for those Democrats who want to curtail the Trump tax cuts without exception. Several aspects of the law, such as an expanded child tax credit and a higher standard deduction that simplifies the filing process for many people, are popular with many voters.


Republicans say they hope that any tax increases by Democrats would become self-inflicted wounds in 2020. So far, about a year and a half since it was signed into law, only 32 percent of people view the overhaul favorably, according to an average of polls compiled by Real Clear Politics.


“What we have done is raise the economy and lifted people across the income spectrum,” said Representative Tom Rice, a South Carolina Republican. “Why they would want to go back on that is insane to me. Hopefully the American voters will see that in the next election.”

— With assistance from Kaustuv Basu




Is VAT a villain?

By Roger Russell


Tom Wheelwright does not like tariffs. But he sees the current interest in tariffs on the part of the Trump administration partly as an attempt to correct the imbalance caused by value-added taxes imposed by our trading partners.


“The reason there is a tariff war is because the way the U.S. tax law is structured, imports are heavily favored compared to our exports,” said Wheelwright, a CPA and CEO of WealthAbility. “All of our trading partners have a value-added tax — think general sales tax — that applies to imports and not to exports. So when we export something to them, they tax that import with a value-added tax in addition to an income tax. We have an income tax but no value-added tax.”


“Although we do have state sales taxes, until recently companies from outside the U.S. have not been required to pay even that. But the Supreme Court decision in Wayfair will change that,” he observed.


“So there is a basic inconsistency between the way we tax imports and the way the rest of the world taxes imports,” he said.


“Also consider that goods in the U.S. are fairly inexpensive compared to the same products you purchase in Europe or China. The exact same goods — same brand, same model, etc. — are typically more expensive in China or Europe than they are in the U.S.,” he said. “Keeping prices low has been a priority of U.S. economic policy. Obviously, this changes with tariffs in the picture. The alternative of a VAT would mean higher prices on both imports and U.S.-produced goods, which is not necessarily a bad idea.”Impact of trade policies on CPA executives' businesses


“A value-added tax would never start a trade war and could end the current trade wars because the countries receiving the tariffs have value-added taxes of their own,” he continued. “China is currently at 16 percent, but is scheduled to go down to 13 percent this year. Europe’s value-added taxes are even higher.”


The VAT is a consumption tax, but we’re already moving in a direction away from income tax and toward taxing consumption, according to Wheelwright.


“If you look at all the deductions that were eliminated in the Tax Cuts and Jobs Act, and then look at bonus depreciation and Opportunity Zones for investors, the result is that as long as your income is reinvested into business it’s not taxed,” he said. “The only income that ends up subject to income tax is that portion used for personal consumption, so VAT is not that big a difference.”


Of course, one of the problems with new taxes is they keep piling on top of the existing taxes, and never go away. “Europe just kept adding tax after tax, to the end that most countries have a total rate around 70 percent,” he expanded. “That’s why there are so many tax cheats there — once the rate is above 40 percent, it creates a tremendous incentive to do something about it.”


“I’m not advocating a VAT,” Wheelwright said. “But a VAT and a tariff are essentially the same thing. A tariff is more tactical because it is directed at a particular industry or country, while a VAT is more strategic.”


“There is a whole list of good reasons not to have a VAT, but it can’t be ignored that the consequence of not having a VAT creates the potential for tariff and trade 



Trump’s tax law made Americans less charitable, nonprofits say

By Laura Davison


Americans gave less money to charities last year partly because the Republican tax law changes made many people ineligible for tax breaks that can inspire donations.


Giving by individuals fell an estimated 3.4 percent, after adjusting for inflation, last year, according to a report released Tuesday by Giving USA. The numbers reflect the first year of the 2017 tax overhaul that expanded the standard deduction, a simpler way of filing taxes, but also excluded millions of taxpayers from claiming a tax break for donating to charity.


Total estimated giving by corporations, foundations, as well as individuals, fell about 1.7 percent, after inflation, to $427.7 billion. Individuals account for more than two-thirds of all charitable giving. Increases in donations from corporations and foundations helped offset some of the losses from individuals.


 “The environment for giving in 2018 was far more complex than most years, with shifts in tax policy and the volatility of the stock market,” Rick Dunham, chair of Giving USA Foundation, said in a press release. The report is based on data provided by donors, fund-raisers and nonprofits.


The 2017 tax law nearly doubled the standard deduction to $24,000 for a couple. That change meant it was more advantageous for millions of taxpayers to file using the lump sum deduction, rather than tallying up all their tax breaks from mortgage interest payments, state and local taxes and charitable gifts.


Only about 18 million taxpayers itemized in 2018 down from 46.5 million the year before, according to estimates from the nonpartisan Joint Committee on Taxation. About 88 percent of filers last year took the standard deduction, which means they couldn’t write off their donations.


Religious congregations are likely to be among the most affected by the decline of individual contributions because most of their donors are also members of the church, synagogue or mosque. Congregations also don’t receive donations from corporations or foundations, Una Osili, an associate associate dean at the Lilly Family School of Philanthropy at Indiana University, said in a call with reporters.


Some nonprofits predicted that contributions could decrease substantially following the tax law changes, but the most recent data don’t show the most dire estimates coming to fruition.


Republicans and Democrats have both contemplated making the charitable contribution deduction an “above the line” tax break, meaning that taxpayers can claim it regardless of whether they itemize or not. Such a change, however, is unlikely to pass in the near future. That change could cost as much as $515 billion over a decade, according to estimates from the Tax Foundation.




Cryptic indeed: Tax pros and clients need to know more about crypto

By Jeff Stimpson


IRS guidelines seem clear: making profits on cryptocurrencies means paying taxes on the gains, with the transactions considered like stock transactions — yet many remain fuzzy on how Bitcoin and other virtual, ether-space assets generate tax — or, for that matter, profit. There seems to be a lot of education needed for both clients and tax practitioners.


“What are they and how did they come into existence? Bitcoin is confusing to me,” said Enrolled Agent Janie Biddix of Advanced Tax Specialists in Dalton, Georgia.


“I’d like to develop and educate my clients about proper recordkeeping and documentation and the tax consequences related to the failure to do so,” said Janet Sienicki, an EA in Schererville, Indiana.


“I have a few crypto clients but I think this is a fad that will fizzle — until an exponential version of it will be the basis of the one world currency,” Chris Hardy, an EA and managing director with Paramount Tax in Georgia.

Volatile but useful

Cryptocurrencies remain headline-catching assets, despite the value of digital money plummeting last fall. Since then, lenders found a silver lining by pushing people who have paper profits to leverage them into cash by borrowing against their cryptocurrencies. A former Wall Street trader, for instance, used some of his Bitcoin as collateral to borrow nearly $100,000, a move that let him keep his cryptocurrency and avert a tax bill on the newly acquired cash.


The tax perk stems from a longstanding principle that assets aren’t taxed until sold, much like borrowing against stock holdings. “Cryptocurrency is similar to an extremely volatile stock or commodity,” said Brian Stoner, a CPA in Burbank, California. “You just need to make sure your clients give you all the information about their purchases and sales so you can calculate gains correctly.”

‘Out of my league’

Tax preparers and clients both seem to want more from tax authorities on how to properly record cryptocurrency and its transactions — and the sooner, the better. “I’d like to see the IRS adopt the American Institute of CPAs’ FAQ on cryptocurrency,” said Nick Preusch, a CPA and tax manager with Top 100 Firm PBMares in Fredericksburg, Virginia. “Clear guidance on forking would be great.”


(A “hard fork” in cryptocurrency parlance is a radical change to the rules of the blockchain that have underlain an individual cryptocurrency, creating, in effect, a new blockchain — and thus, potentially, a need for a change in how the asset is treated. An analogy from other asset types might be a stock split.)


“More guidance on the reporting and valuation requirements surrounding the donation of cryptocurrency to charitable organizations” would be useful, according to Barry Kleiman, a CPA and principal with Untracht Early, in Florham Park, New Jersey. “Also, the tax treatment of a cryptocurrency hard fork: Is it taxable? If so, how do you determine the amount and the timing of the recognition of income?”


Some private sources in the profession, in the meanwhile, try to pick up the slack. “People trade, buy and sell cryptocurrency just like people do on the stock exchange,” reads a recent blog post of The Income Tax School. “As a tax professional, you need to know how to talk to your clients about cryptocurrency.”


The post goes on to offer a very useful glossary; entries range from Altcoins (“any coins that aren’t Bitcoin”) to Whale (“someone who owns a very large amount of cryptocurrency”) to the increasingly familiar Pump and Dump (“the cycle of an altcoin getting a lot of attention, rising quickly in price, and then crashing”).


“Not sure that I really want to learn about bitcoin, cryptocurrency and other new methods of payment. Usually I’m on the bleeding edge of technology, but these currencies seem a little out of my league,” said EA Terri Ryman of Southwest Tax & Accounting in Elkhart, Kansas. “I’m sure that I’ll be forced to study up on them but not until I have a client inquire. Although I am a little bit nervous that they’re already trading with cryptocurrencies and just aren’t telling me when I ask.”




Canada & U.S. hold national celebrations this week, as well as share many tax similarities


It's a big week for two North American countries.


On Thursday, we United States residents celebrate July 4th, the day the founding fathers signed the Declaration of Independence.


Celebrations already are underway north of the 49th parallel. July 1 is Canada Day.


I've been a big fan of our northern neighbor for decades, initially discovering its delights as I fell in love with hockey when the hubby and I lived in Washington, D.C./Maryland and soon became Washington Capitals season ticket holders.


That necessitated many trips to Canada to more fully appreciate the country where hockey was born.


And while hockey certainly is a worthy contribution to global sports and a major Canadian cultural touchstone, there's much more to celebrate.


Stewart Reynolds, a Canadian YouTuber and "the internet's favourite dad* (*unproven)" known as @Brittlestar, provides details in his Twitter post EXPLAINING CANADA DAY TO AMERICANS.


Yes, a Canadian YELLING on the intrawebz!



Aside from the hockey clarification — U.S. NHL teams win the Stanley Cup with teams of mostly Canadian players — I also appreciated Brittlestar's notation that his country has "beer. Actual beer. Not yellow water."

I will footnote poutine though. As a Texan, I like my gravy smothering chicken fried steak and mashed potatoes.


And I have to give a shout out to America's southern neighbor, Mexico, for all its culinary contributions, especially here in the Tex-Mex crazy Lone Star State.


But I digress. It is Canada Day. Not NAFTA/USMCA Day. 


You can find more things Canadian to celebrate today at the Twitter hashtag #CanadaDay.


Here's hoping it's a great one!


North American tax matters: Of course, I would be remiss if I didn't mention taxes.


Canada's and the United States' tax systems are, not surprisingly, a lot alike. That's understandable since both countries have similar economic systems, share extensive trade ties (so far…see NAFTA etc. link above) and both have legal systems based on British common law.


Both countries also require tax be paid on income generated worldwide, according to Taxes for Expats.


But, the tax firm notes, while U.S. citizens and permanent residents must pay federal taxes to the U.S. Treasury regardless of where they live, Canadian citizens not living in that country are subject to different rules than residents. Most income derived outside of Canada does not get considered in calculating income tax in Canada.


As for the due dates on applicable taxes, Canadians file income taxes by April 30. Americans' Tax Day is April 15.


State vs. provincial taxes: In addition to federal taxes, most U.S. states impose an income tax.

Canada taxes services via the Goods and Services Tax (GST) or the Harmonized Sales Tax, which resembles Europe's Value Added Tax.


Taxes and retirement savings: The two countries also offer their citizens tax-favored retirement savings plans.

Canada's Tax-Free Savings Account (TFSA) is roughly like the Roth IRA in the United States.


Both are tax-exempt and both are funded with after-tax money. Both provide tax-free growth and funds (including earnings) are tax-free upon withdrawal.


Where taxes go in each country: OK, I can see some of y'all nodding off. Take a break. Watch @Brittlestar's video again.


Refreshed? Smiling? OK, back to U.S. vs. Canada taxes.


The main tax issue usually cited by Americans is that Canadians pay more taxes than us. But as noted in the video, they get more government services for their taxes, notably health care.


And at least one recent study found that, even after TCJA enactment, Canadians pay lower income taxes than their neighbors to the south.


The disparity is particularly notable, according to Organisation for Economic Co-operation and Development (OECD) data, for families. Canadians with children are paying much, much less than Americans.


Yeah, I know skeptical Americans are seeing that British Commonwealth spelling and are immediately suspect of the OECD calculations. And I admit that numbers can be parsed a variety of ways.


Still, it's worth considering in this week when the United States and Canada share national celebrations of what is great about our two countries that we can learn from each other, be it taxes or social services or beer or general approaches to life.


Wherever you call home, here's wishing you a safe and wonderful holiday this week.


And I bid you, per bilingual Canada, farewell and adieu with a tune from one of my favorite Canadian rock bands, Rush.   Remember, we're only immortal for a limited time.




Making Trump’s tax cuts permanent would cost nearly $920B

By Laura Davison


Extending tax cuts that are intended to benefit families and small businesses come with a steep cost — nearly $920 billion through 2029 — according to Congress’s nonpartisan scorekeeper.


That figure would add to the total cost of the $1.5 trillion tax overhaul Congress passed in 2017, according to the report issued Monday from the Joint Committee on Taxation. The law included an array of temporary tax cuts, including lower individual rates, more generous child tax credits and a 20 percent deduction on profits that pass-through businesses earn.


Those tax breaks will all expire at the end of 2025. President Donald Trump’s fiscal year 2020 budget request called to make those tax cuts permanent.


Democrats criticized the 2017 law because it made tax cuts for individuals temporary, while making corporate tax cuts permanent. The corporate tax changes included cutting the rate to 21 percent and overhauling how overseas profits are taxed.


The temporary tax cuts set up lawmakers for a tough decision at the end of 2025 — extend the expensive tax cuts or raise taxes on families and many small businesses ahead of the 2026 midterm elections.


Congress is likely many years away from prioritizing an extension of those tax cuts. Last year, the House, while still under Republican control, voted to make the individual tax cuts permanent, largely to generate political support going into the midterm elections. The Senate didn’t advance the bill.


Lawmakers of either party have often voted to extend tax breaks just before they’re scheduled to disappear. Members who have decried the changes when they’re initially inserted into the code are generally reluctant to erase all of the benefits years later.


That’s what happened with the tax cuts passed in 2001 and enhanced in 2003 under President George W. Bush. Those cuts were set to expire in 2010, but were extended for two additional years. Then, in the early days of 2013, President Barack Obama and Congress worked out a budget deal to make the tax cuts permanent for most earners.


The decision in 2017 to phase out the individual tax cuts was largely one of necessity — lawmakers needed to fit the tax cuts within the $1.5 trillion loss that Congress allotted itself. At the time, lawmakers publicly said they would vote to extend the tax cuts at a later date.


The numbers from the Joint Committee on Taxation came as new data suggests that the tax overhaul isn’t generating as much revenue as initially anticipated. The Bipartisan Policy Center, a think tank, said there is “significant risk” that the U.S. will breach its debt limit in September, revising an earlier prediction of October to November, as a result of declining corporate tax revenue projections this year.




It may be now or never in Trump fight to keep Mazars accounting records from House

By Andrew Harris


Time is tight for Donald Trump’s lawyers in their fight to keep the president’s financial records out of the hands of congressional Democrats.


Attorneys for the president on Friday will ask a U.S. appeals court panel in Washington to reverse a trial judge’s decision giving a House committee access to documents dating back to 2011, currently held by Trump’s longtime accounting firm, Mazars USA LLP.


If the panel rules against them, the lawyers might not get another shot. The Supreme Court, seeing settled law in the case, wouldn’t be eager to take it up, some legal experts say, making the appeals court ruling final. Either way, the outcome of the Mazars dispute, and of two others involving the president’s records, will likely have far-reaching consequences.


 “We are talking about rulings that could have significant constitutional implications going forward for the balance of powers,” said Matt Dallek, a political historian at George Washington University. “The larger question,” he said, is do the rulings reduce Congress to “a second-rate branch.”


Hotel Revenues

The House Oversight and Reform Committee contends that Congress enjoys broad investigative power and that the committee must ensure the president is acting in the country’s best interests. Its document demand reaches back to 2011 because that’s when the federal General Services Administration began soliciting bids for redevelopment of the property that became Trump’s Washington hotel, they said.


The hotel could be a pipeline for the president’s receipt of revenue from foreign governments, a potential violation of one of the Constitution’s emoluments clauses, according to the committee. It wants the panel to uphold U.S. District Judge Amit Mehta’s ruling rejecting an attempt to block the subpoena.


The congressional powers at issue in Mazars and the other cases aren’t new, said Steven Schwinn, who teaches constitutional law at the John Marshall Law School in Chicago. Lawmakers exercised their authority during the Watergate and Whitewater probes, when Congress also delved into acts the president committed before he took office. The administration’s legal efforts could result in an appellate ruling reaffirming congressional power rather than reducing it, he said.


At that point, he said, “my guess is that the Supreme Court won’t want to touch this,” because the president’s arguments are weak and the law is settled.


Established Law

“I don’t know that the Supreme Court would take this case,” said Irv Nathan, who served as general counsel to the House of Representatives from 2007 to 2010, during Nancy Pelosi’s first term as speaker, “because the legal principle is well established and not really arguable.”


Trump’s lawyers argue that Congress needs a legitimate legislative reason to see the records and that new conflict-of-interest or financial-disclosure requirements wouldn’t meet that standard because they would alter the constitutionally set qualifications for the presidency. They also argue the committee is attempting to conduct a law enforcement investigation, usurping powers reserved for the executive branch.


“Congress cannot launch an investigation to determine whether someone broke the law, and then justify the investigation by claiming that Congress is considering strengthening or studying the law that the person allegedly broke,” according to their appellate brief.


University of Iowa law professor Andy Grewal sees a danger there for the House.


Risk of Backfire

“The history in this area shows that Congress can get almost anything it wants from private parties, but it gets from the executive branch only what that branch wants to give,” he said. While precedent suggests Congress has the upper hand in the Mazars battle, he said, the tight focus of its brief on the president’s conduct could serve to buttress Trump’s claim that Congress is impermissibly engaging in law enforcement.


Friday’s arguments come just 10 days after the filing of a House Ways and Means Committee lawsuit to force the Internal Revenue Service to turn over the president’s tax returns for the past six years. They precede an appellate case in New York, where Trump is fighting to regain control over his banking records. That one will be heard on Aug. 23.


Hearing the Mazars case will be a three-judge panel made up of two Democratic presidential appointees — David Tatel, appointed by Bill Clinton, and Patricia Millett, by Barack Obama — and Neomi Rao, named to the bench by the president himself.


Despite the legal pitfalls he sees for the House panel, Grewal said the case seems an unlikely one for Supreme Court review, since Mehta’s ruling framed the legal issues as settled and the justices don’t traffic in factual disputes. Grewal noted, however, that the high court hasn’t “meaningfully addressed” congressional subpoena power since the 1970s and could seize the opportunity to do so.


A protracted court battle could favor Trump by tying up the issue — and the records — as the presidential election approaches, Nathan said.


“They’re seeking to run out the clock,” he said. “I think it’s very important for the House to move with alacrity in these matters, but also more important for the courts.”


The case is Trump v. Mazars USA LLP, 19-5142, U.S. Court of Appeals, District of Columbia (Washington).




How Much Turnover Is There Among the Richest Americans?

Robert Bellafiore

Tax Foundation


Income inequality has been a prominent topic on the presidential campaign trail, leading to proposals for wealth taxes, higher marginal income tax rates, and other policies. As scholars and everyday taxpayers continue to debate this issue and the question of increasing taxes on the richest Americans, one observation to keep in mind is the high degree of turnover among the highest-income Americans.


The following chart, using data from the Internal Revenue Service (IRS), shows the frequency of those filing who make the top 400 individual income tax returns with the highest adjusted gross income from 1992 to 2014. Of the 4,584 people who made it into the top 400 at some point over that period, 3,262 qualified for only one year. In other words, 71.2 percent of those who were in the top 400 made it once and not again.


Of that same overall group, 138 people did qualify for at least a decade. Nevertheless, the top 400 remains far from a monolithic group that is impossible to enter or exit. As an older updateof this data, from 1992-2006, concluded, “The data…mostly represent a changing group of taxpayers over time, rather than a fixed group of taxpayers.”

Richest Americans, Income Inequality, Presidential Campaign Trail

This data illustrates another important point about how tax rates, or the share of the tax burden on an income group, have changed over time: We should not conclude without evidence that it is the same people in that income group the entire time. For example, it can be easy to look at data on the top 1 percent’s tax rates over time and assume that the same people belong to that group in every year. However, such data on its own often doesn’t tell us whether a given income group represents the same people year after year, experiences a complete turnover annually, or something in between.


When the data does provide information on the people in a given group, as is the case here, the results can be surprising. At least among the top 400 such filers, there is more turnover than many might think. Policymakers and taxpayers should keep this in mind and be careful not to jump to unjustified conclusions as they consider the many changes to our tax code being debated today.


For more information on the taxation of the highest-income Americans, the evolution of the tax code, and the distribution of the tax burden, see our recent blog series, Putting a Face on America’s Tax Returns.








Five Things to Know about the Pending Tax Treaties in the Senate

Daniel Bunn

Tax Foundation


On June 25, four tax treaties were passed out of the Senate Foreign Relations Committee. There is an expectation that the treaties will soon be considered by the full senate. The four treaties include updates to existing tax treaties with Spain, Switzerland, Japan, and Luxembourg.


The four treaties that passed on June 25 are not the only ones pending in the Senate, however. There are also tax treaties with Poland, Chile, and Hungary. Additionally, there is the Protocol Amending the Convention on Mutual Administrative Assistance in Tax Matters.


Unlike the bilateral tax treaties, the Protocol is a multilateral agreement open to all countries and is part of a set of multilateral agreements designed to facilitate automatic sharing of information among tax authorities—even with countries where we do not have tax treaties.


All seven treaties and the Protocol were previously passed by the Senate Foreign Relations Committee in 2015 during the 114th Congress. However, just the treaties with Spain, Switzerland, Japan, and Luxembourg are currently moving ahead in the Senate. Affirmative votes from two-thirds of the Senators present are required for a treaty resolution to be approved.


Tax treaties align many tax laws between two countries, particularly with regard to withholding taxes, and attempt to reduce double taxation. Countries with a greater number of partners in their tax treaty network have more attractive tax regimes for foreign investment and are more internationally competitive. The U.S. currently has 58 income tax treaties with countries around the world. According to the U.S. Chamber of Commerce, companies from the seven bilateral treaty countries have invested more than $1.2 trillion in the United States and those investments are connected to hundreds of thousands of U.S. jobs.


This post will highlight five key issues relating to tax treaties generally and provide some context for the treaties pending in the Senate.


1. Why are tax treaties important?

Companies that operate in several countries often face various tax issues that arise in jurisdictions with differing laws. For example, a Japanese company that owns and operates a factory in the United States will need to know how profits from that U.S. subsidiary will be taxed. Additionally, the company will need to know what taxes will apply to dividends from that U.S. subsidiary to the Japanese headquarters or other shareholders.


To simplify things and clarify which countries can tax what income and when, countries often enter into bilateral and sometimes multilateral tax treaties. These treaties commit countries to playing by the same set of rules when taxing multinational businesses.


The treaties facilitate cross-border trade and investment by creating certainty for investors when they are making decisions about setting up new offices and factories in another country or deciding to build a manufacturing base in the United States.


2. What does taxation look like in the absence of a tax treaty?

In the absence of tax treaties, most countries apply withholding taxes to dividends paid by a subsidiary to its headquarters or other shareholders in another country. The U.S. applies a 30 percent withholding tax to payments to foreign shareholders in situations where there is not a tax treaty. If the foreign country also taxes those dividends, the result would be double taxation.


The foreign shareholder (whether it is an individual or a foreign company) could file a tax return with the U.S. to try to reconcile its domestic tax liability with its U.S. liability. However, without a tax treaty in place, the U.S. could simply choose not to refund part or all of the withholding tax collected.


Domestic and foreign withholding taxes act like sand in the gears of the global economy, making it more challenging for foreign businesses to invest in the U.S. and for U.S. companies to invest abroad. In effect, they raise the required rate of return necessary for investors to choose to invest in another country. If a Spanish company would like for a new office in the U.S. to generate a certain level of profits for it to be worthwhile, the U.S. withholding tax on dividends (absent a treaty) could in some cases keep that investment from happening.


3. When were these treaties negotiated?

The treaties pending in the Senate were all negotiated and signed several years ago: In 2009 with Switzerland and Luxembourg; in 2010 with Hungary and with Chile and the Protocol; in 2013 with Poland and Japan; and in 2014 with Spain.


Over the years, not only has the U.S. significantly changed its tax rules, but our treaty partners have made reforms as well. Businesses interested in growing their footprint either in the U.S. or in a partner country through reforms have effectively had those benefits delayed while waiting for the Senate to approve the treaty resolutions for ratification.


As mentioned, the seven treaties and the Protocol were passed out of the Senate Foreign Relations Committee in 2015, but the ratification resolutions were never considered or approved by the whole Senate.


4. What has changed for exchange of information?

One of the reasons that ratification has been delayed is that Sen. Rand Paul (R-KY) has concerns that the treaties would fail to protect the privacy rights of U.S. taxpayers.


Under a tax treaty, tax authorities (like the IRS) can request information connected to disputes with the partner country in order to evaluate facts that are relevant to the case or to carry out other treaty provisions. The requested information is protected by secrecy requirements embedded in the tax treaties.


The bilateral treaties each have articles that address this exchange of information between the tax authorities of our partner countries and the IRS. The language in these articles reflects the U.S. model treaty that allows tax authorities to request information that is “foreseeably relevant” to settling a tax dispute. This is a shift from previous treaty language that required requesters to make the case that information was “necessary” to addressing a tax dispute.


The U.S. already uses the “foreseeably relevant” language in exchange of information agreements with the British crown dependencies and some other taxing jurisdictions. Other tax treaties allow exchange of information that “may be relevant” to carrying out the provisions of the treaties. This language is in our tax treaties with nine other countries including Canada, France, New Zealand, and India.


Some recent international court decisions have provided some basis to understand when governments requests for information meet the “foreseeably relevant” standard.


In general, the process of requesting the information by one tax authority to another is what sets apart the bilateral treaties from the multilateral Protocol. It is very different from a privacy standpoint to have an automatic exchange of information with other governments under the Protocol rather than standard bilateral requests for information.


5. Why are just four of the treaties moving ahead?

Among the bilateral treaties, the three with Hungary, Chile, and Poland are not currently moving ahead and were not passed out of the Senate Foreign Relations Committee on June 25. This developed in regard to treaty implications of the Base Erosion Anti-abuse Tax (BEAT).


According to a letter sent by Sen. Bob Menendez (D-NJ, ranking member of the Senate Foreign Relations Committee), the Treasury Department included reservation language concerning the BEAT in the resolutions of advice and consent for the treaties. Sen. Menendez points out in his letter that such reservations could trigger renegotiation of the treaties.


Treasury has decided that the reservation language is not necessary for the other four bilateral treaties and the Committee was comfortable moving ahead with those treaties. It is unclear how much of a delay the reservations regarding BEAT will cause for the tax treaties with Hungary, Chile, and Poland.



The variety of approaches that countries take in tax policy can create some serious challenges to cross-border business and trade. Tax treaties are designed to limit these challenges and avoid double taxation of income. The bilateral treaties pending before the Senate present an opportunity to make the U.S. a more attractive place for companies from our treaty partner countries to invest and hire.




New risks for tax audits

By Roger Russell


The Internal Revenue Service audited just 0.59 percent of individual tax returns in fiscal year 2018, a slight decrease as the agency continues to suffer from budget cuts and staff reductions.


Cuts in the IRS budget from $14 billion in 2010 to approximately $12 billion in 2017 have resulted in staff reductions by about one-third during that time frame, according to Glenn DiBenedetto, a CPA and director of tax planning at New England Investment and Retirement Group. “IRS staffing dropped to less than 10,000 agents for the first time since 1953,” he said.


As a result of the cuts, audit rates have dropped for all income groups, but at a much greater percentage for high-income earners, he explained. “Audits of people earning over $10 million dropped 52 percent between 2011 and 2017, according to ProPublica.”


A study by the Transactional Records Access Clearinghouse at Syracuse University found a similarly steep drop in audits of millionaires; nevertheless, the audit rate for high earners — at 6.66 percent in 2018 — is much higher than the 0.59 percent overall rate for individual returns.


The Tax Cuts and Jobs Act includes tax savings opportunities for high-net-worth clients, while eliminating a number of deductions that might have triggered audits for those in the lower brackets, according to DiBenedetto.

Millionaires being audited by IRS

“The average employee used to take advantage of miscellaneous itemized deductions such as employee business expenses and entertainment expenses,” he said. “The elimination of those deductions took away an area of high audits.”


“But high earners will have complexities with their returns that the lower earners don’t have,” he observed. “They often have multiple limited partnerships and complicated investments. They have a greater ability — and need — to hire advisors to develop strategies, and tend to get audited on any ‘gray area’ positions they take.”


“The TCJA made available a number of opportunities that might trigger an audit,” he said. “This includes the 20 percent qualified business income deduction on certain income from pass-through entities and other investments. Lack of clarity, income thresholds, and other limitations have prompted tax professionals to seek and develop strategies to maximize the benefits for their clients. Likewise, opportunities for changes in accounting methods became available. These include the use of the cash method of accounting and reduced inventory tracking, available for taxpayers that meet the $25 million gross receipts test.”


And individual returns may be audited in connection with a pass-through entity, DiBenedetto noted: “Keep in mind that most of these changes came into play for the first time in 2018, and the IRS may take some years before they gear up to audit the various changes brought on by the Tax Cuts and Jobs Act.”


Unlike individual returns, estate tax returns are routinely audited, according to Linda Hirschson, a shareholder at law firm Greenberg Traurig.


“Basically, if an estate is a taxable estate and is sufficiently large, we assume it will result in an estate tax audit,” she said. ”If there’s no surviving spouse and the estate exceeds the available exemption, we assume it will be audited. If there’s a surviving spouse and a marital deduction, it’s possible that it won’t be at the death of the first spouse, but if it’s large enough, it would be audited on the death of the surviving spouse.”


Hirschson advises estate tax return preparers to be forthcoming in disclosing information relevant to the return.

“My preference is to be as inclusive as possible on the estate tax return,” she said. “The IRS should have all the information it needs, and doesn’t have to come back to you and ask ‘Where’s this?’ Make sure that everything is complete.”




Accountants get involved with sustainability issues

By Michael Cohn


Accountants are helping the companies they work with deal with the kinds of sustainability issues that are becoming more of a concern for investors.


“Everyone thinks of accounting as measuring profit and loss, or something along those lines,” said Shari Littan, manager of corporate reporting technical activities at the Institute of Management Accountants. “But if you really look at what accounting is, it’s considering the fact that you have limited resources. Your organization and clients have limited resources so we have to collectively make decisions.”


She compared it to the iconic 1968 photo that astronauts on the Apollo 8 mission took from space of “Earthrise,” the first time that humanity saw Earth rising as a small blue planet in the distance.


“That’s what accounting is about, saying, 'How do I use the precious resources that I have?'” Littan said during an interview last week at the IMA’s annual conference. “What's the best use for them? For a long time, we thought it was only measured in financial resources. But there are other limited resources that are going to build a business, run a business, create value and maintain value. You have to have an understanding that other resources are limited too — the amount of water you can get, the amount of carbon that the world, the Earth and the atmosphere can absorb without causing some other harm, the amount of waste that we can put out — and all of these things are limited. So the idea is to say that if they are limited, how do we make better decisions? And if we're going to make better decisions, what information is it going to lead to and who is providing this information to the decision-maker? These things need to be taken into account.”


She is seeing more demand from investors for sustainability information, particularly from large multinational companies. “Any company that has significant business in Europe, for example, gets caught up in the EU non-financial reporting regulations,” said Littan. “The other aspects of it that affect U.S. companies are supply chain issues, if you are trying to do business with an EU company or trying to do business somewhere else in the world.”


She believes that more U.S. companies will feel pressured to report on such information as more of their competitors do. “If you're competing for capital, and investors are increasingly looking at this data — because it’s showing up on the Bloomberg terminals where you get your [environmental, social and governance] data and ratings — if a company sees that its competitors are reporting on something and they're not reporting on it, that’s another driver for them, at least from a market response, to start reporting,” said Littan. “The reporting aspect of sustainability accounting is global.”


Groups such as the Sustainability Accounting Standards Board, the International Integrated Reporting Council, the Global Reporting Initiative and the Carbon Disclosure Project have developed various reporting frameworks for sustainability reporting and are trying to align them through an effort known as the Corporate Reporting Dialogue.


“To some extent these organizations have put out frameworks that are somewhat competitive,” said Littan. “But in practice companies are saying, ‘Oh, I’d like a little bit of this framework and I’d like a little bit of that framework for our reporting.’ The Corporate Reporting Dialogue is trying to harmonize the different standards, which is not an easy thing to do. They are looking most closely right now at the recommendations of the Task Force on Climate-related Financial Disclosures that was established by the Financial Stability Board. They determined that climate change has a huge financial risk. One is the risk of weather events, and the second is stranded asset risk. A company has invested and built up its business model and its assets for a fossil fuel world, but now as companies move away from fossil fuel, you have the potential for unusable assets.”


Accountants can advise the companies they work with about both the risks and the opportunities available to them. “You can talk about risks, but you can also think about the opportunity aspects of it,” said Littan. “Even some small businesses are looking at how to reduce waste. That's an accounting and financial question right there. If I move to a zero-waste company, think of what I can save, and I‘ve built my reputation at the same time. So there's a lot of win-win going on for that little bit of innovation.”


While there are all kinds of climate-related risks that are becoming apparent, Littan also sees opportunities for companies that are looking for innovative solutions to the problem of climate change.


“They’ve got to think about what the world’s going to look like in 2070," she said. "Will you still be able to produce milk in California? Will you be able to put a hotel on the beach in Puerto Rico? These are real questions. Or you hear about starting a business to find a way to break down plastic or take plastic out of the ocean. That becomes competitive, but also it's a way to create a whole new business model. From the finance and accounting perspective, there are strategy issues. There are ways to think about what your competitor is doing or is not doing. There is a way to position yourself with your customers, your employees and your shareholders who have a longer-term vision to get the investors that you want. So it becomes not just a question of looking at sustainability issues because it's a nice thing. Yes, it’s a nice thing, but there are real costs and there are real opportunities.”




How AI Is Reshaping the Accounting Industry

by ITS Admin


Artificial intelligence is on the rise and affecting all industries globally, including accounting. Artificial intelligence is all about extending what the computer is capable of doing to another level. It allows systems to make predictions and changes accurately, similar to human beings. It also enables computers to do something that was left to human beings; machine learning.

Most people hate the mundane tasks associated with accounting. Artificial intelligence is making everything simpler, easier, and better. Research conducted by MIT Boston found out that eighty percent of the people around the world believe that artificial intelligence enhances the competitive advantage.


Also, 79% believe that the rapid advancement of technology will boost the productivity of any organization. Today, artificial intelligence is being used to analyze vast volumes of accounting data quickly; something that is not easy for most human beings.


According to best dissertation, every organization that wants to grow and have a large chunk of the market needs to embrace and implement new technologies being developed today. At the center of any organization’s operations is accounting. If accounting operations are performed accurately and quickly, the managers of the organization can make the right decisions easily because they understand the direction the business is heading.


With AI, every piece of data handled and processed is automated. Therefore, reports generated will be automated and accurate. Again, data can be easily accessed from different sources and forwarded to the responsible accounting head. AI will handle many other tasks that were handled by accountants such as processing accounts receivable and accounts payable, improving cost management.


Five Accounting Tasks that Machines Will Do

Apart from making human work easier, AI can also improve the accuracy and efficiency of most accounting operations. Accountants who embrace technology will be highly valuable today and in the future.


Monthly and quarterly close procedures

The earlier you get the numbers, the better the decisions you’ll make. Every strategy needs to be analyzed from angles before it is implemented. Action without thinking is the cause of frustration and failure in any business as reported by academized review. AI will provide data from different sources which can be merged and produce accurate results.


Purchases and supplies

Most procurement operations in many organizations comprise of paperwork in various formats that don’t relate to each other. This becomes a big accounting issue when closing accounts at the end of every financial year. With AI, machines can be integrated, and different formats of data can be accurately processed in minutes. This makes the procurement of operations paperless and secure. The extra time left can be used to perform other vital tasks.



Nowadays, every digital file can be easily tracked and accessed. You can quickly know who accessed a specific folder when, enhancing the security of your files and any other vital data.


When auditors visit your organization, they don’t need to start searching cabinets and drawers because they can access digital files in seconds. The audits performed will be accurate and efficient because the auditors will not just analyze a few samples of the financial transactions but all of them quickly and easily.


Managing expenses

Anyone who has ever reviewed an organization’s expenses to ensure that they are compliant knows how tiresome and frustrating it is. With AI, you have nothing to worry about. Your life has just been made easier. Most programs can read receipts, analyze expenses and warn employees or managers if there is a breach.


Solving common queries

Using AI, machines can solve quickly and efficiently common questions that customers may have such as explanation on billing, current account balances and status of their accounts or business. You don’t have to rush to your desk to answer the same questions all day.


Does AI mean accountants will lose their jobs?

When most of the important accounting tasks such as audits, filing taxes and banking are fully automated using artificial intelligence, what will accountants do? Will they lose their jobs?


Artificial intelligence has definitely made an accountant’s work easier and this enables them to focus and perform on important tasks. According to custom essays, AI is not taking the place of accountants instead; it has just made their work easier.


When accountants have the time focus on the most important aspects of business such as customer service, the business will grow to meet future demands.


Again, software will perform the calculations quickly and effectively but all this is useless if no one is there to analyze and interpret the findings. When AI becomes fully automated, accountants will become consultants and advisers so that they can take full advantage of AI.



Artificial intelligence is impacting the accounting sector positively by reducing expenses and improving productivity. The precision and accuracy which AI brings to the table definitely put the organizations that embrace it on the angel’s side. Accountants should not fear losing their jobs. AI is not here to replace them but to make their work easier. And help them succeed buy focusing on the most important tasks.


This blog was guest written by Michael Gorman. Michael is high skilled freelance writer and proofreader from UK who currently works at custom writing and essay writing services. Being interested in everyday development, he writes various blog posts for essay writer service and discovers new aspects of human existing every day. You can feel free to contact Michael on Twitter and Facebook.




What is Business Impact Analysis?

 by Heather Jankowski, CIA, Senior Consultant – Risk Advisory Services 


Is Your Company Ready for the Business Impact of the Next Natural Disaster?

Throughout 2018, we witnessed numerous natural disasters. From Hurricanes Michael and Florence to the California wildfires, these disasters amounted to billions of dollars of damage. Despite the hurricanes and wildfires that lay siege through the Florida panhandle, Northern California, and the Carolinas, many companies fail to acknowledge the risks of these types of disasters and the detrimental effects they can have on business operations. Sadly, these devastating disasters cannot be prevented, but you can take the necessary steps to protect your business from suffering interruptions to critical systems and processes.


What is a Business Impact Analysis and Why is it Important?

Business Impact Analysis (BIA) is an evaluation of the possible impact to various processes or systems should an interruption or stoppage occur due to an accident, emergency, or disaster. Simply put, the analysis is a way to predict the negative outcomes of disruption to a business or its processes and develop strategies to help the business recover in the event of an emergency. A BIA can provide a clear picture of the critical or essential systems or processes of your business that must be in place to continue to allow the business to run. By determining which processes or systems are critical, your business is able to address the areas which need to be quickly recovered and the amount of time necessary or allowable to recover them.


An Overview of the Business Impact Analysis Process:

Business Impact Analysis Phase 1: Getting buy-in and the green light from senior management for the BIA project. This will also be the phase where the objectives, goals and scope are defined to provide clarity to the overall project. A project manager, along with a project team, will need to be established, or this can be outsourced to a third party.


Business Impact Analysis Phase 2: Obtaining information and data is the next important phase of the BIA analysis. During this phase, the BIA project team will conduct interviews or provide users with a BIA questionnaire in order to obtain the necessary information. A BIA questionnaire is typically a detailed survey which requests knowledgeable users’ questions about their processes, timing and the maximum allowable time of disruption, any operational, financial, regulatory, and legal or compliance impacts that may arise given a disruption.


Business Impact Analysis Phase 3: Now that key information on the business processes has been collected, the information needs to be analyzed and reviewed. This is done in order to accomplish the following:


  • To determine a prioritized listing of business processes or functions, with high criticality at the top of the list.
  • To determine which individuals and technology resources are needed to maintain an ideal level of operations.
  • To determine the recovery time frame, which is the length of time required to recover a business process of function and bring operations back to normal.


Business Impact Analysis Phase 4: The BIA report and a listing of any findings is now able to be documented. The BIA report is typically presented to senior management and should include the following: an executive summary, the objectives and scope of the analysis, any methodologies used to obtain data and information, a detailed listing of the findings and supporting documentation, and recommendations to be implemented for recovery.


Business Impact Analysis Phase 5: The final BIA report should be presented to senior management in order for them to implement any recommendations or make any adjustments to their strategy planning or goals for the company’s disaster recovery or business continuity plan.


Additionally, a best practice is to complete the BIA every two years, depending on how much the business processes or functions have changed. For some businesses it may be shorter and other businesses it may be longer depending on how much has changed since the last BIA was completed.


Connect with Business Impact Analysis Consultants

At Freed Maxick, our Business Impact Analysis team works with you and your company to understand your process from requirements through deployment to understand the complete picture, not just one area.


For more information about business impact analysesdisaster recovery and business continuity plans or other related risk consulting programs and services, please contact or call 716.847.2651.





by Robert D Flach 


Many first-time home-buyers take a distribution from their company’s 401(k) retirement plan to help fund the down payment for the purchase of the home.  And, unfortunately, they tell their tax professional about it AFTER it has been done.


This is a bad idea.  The distribution is included in the federal and probably also state taxable income of the taxpayer – at a cost of 25% to perhaps as much as 40% of the distribution.  In addition, if the taxpayer is under age 59½ he or she must pay an additional 10% penalty for early withdrawal – bringing the cost of the distribution up to as much as 50%.  So, a distribution of $20,000 only puts $10,000 to $13,000 in the taxpayer’s pocket.


The overall tax and other financial benefits of home ownership may eventually outweigh the tax cost of a 401(k) withdrawal, but I still say this is still not a good idea.


If there is no other source of funds for the down payment consider taking a loan from the 401(k) plan, if allowable, instead of an outright distribution.  The interest rate on 401(k) loans is usually low, and you are actually probably paying the interest to yourself.  This loan must eventually be paid back, or the outstanding balance will be treated as a distribution when employment with the company ends.  FYI, the interest charged on the 401(k) loan is NOT deductible on Schedule A.


One way to avoid the 10% premature withdrawal penalty when a loan from the plan is not an option is to rollover a 401(k) distribution of up to $10,000 into an IRA account and then take a $10,000 distribution from the IRA account.  Or just take $10,000 from an existing IRA account instead of the 401(k) plan.  One of the exceptions to the 10% penalty for premature withdrawals from an IRA account is a distribution for first-time purchases.  A purchase qualifies as “first time” if the taxpayer did not own a home in the two years prior to the withdrawal.  This exception DOES NOT apply to premature withdrawals from a qualified plan such as a 401(k).


So, if you are thinking about buying a home your 401(k) plan should be the last place you turn to for funding the down payment.  And you should discuss it with your tax professional BEFORE you do anything.




What Your Scholarships and Grants Mean for Your Taxes?

Jim Wang


College can be very expensive and many students rely on scholarships and grants to help lower the cost of higher education.


When I attended Carnegie Mellon University, I had the help of need-based grants and a handful of merit-based scholarships. Back then, I was just glad to receive help and never even considered the tax implications. Fortunately, the tax code looks favorably at scholarships and grants.


If you are a student who received college scholarships or grants, here are some tax tips to help you understand how scholarships or grants impact your taxes.


Do you really have to pay taxes on a scholarship? The answer is… maybe.


Scholarships and Grants That Aren’t Taxed

The good news is that you won’t pay any taxes on scholarships or grants for what the IRS calls “qualified education expenses.” What qualifies as a non-taxable education expense? Any funds you receive to pay for tuition, school fees, books or any supplies required for courses at your school.


The IRS also notes that to qualify, you must be a “candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.”


There are no taxes to pay if you received a scholarship or fellowship as part of the National Health Services Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program. This also applies to anyone who is part of a qualifying work-learning-service program.


So what scholarships and grants ARE taxable?

Taxable Scholarships and Grants

If you paid for your qualified education expenses and have scholarship funds left over, that money counts as taxable income.


Any scholarship funds that go towards your room, board, or utilities are taxable. Any funds used for college expenses outside of the required supplies for your education are taxable too and applies to any school-related travel that is paid for by the scholarship or grant funds.


If your grants, fellowships or assistance programs require you to provide some type of service while enrolled in school, this could make them closer to a stipend or payment rather than a scholarship. For example, if you received a $10,000 scholarship and $4,000 was designated as compensation for teaching or research while at school, that piece would be taxable income. The remaining $6,000 may not taxable if used towards qualifying education expenses.


Paying Taxes on Scholarships and Grants

If any of the funds count as taxable income, you should receive a Form W-2 from your scholarship’s provider. The W-2 will show you the taxable amount to claim on your taxes. If you don’t receive a W-2, it’s a great idea to reach out to your scholarship provider to find out why.

Also, keep in mind that you cannot “double-dip.” If you paid for qualified education expenses with tax-free scholarship funds, you can’t also claim an education tax benefit like the American Opportunity Tax Credit or the Lifetime Learning Credit.


Don’t worry about knowing these tax rules. TurboTax asks you simple questions about you and gives you the tax deductions and credits you’re eligible for based on your answers. If you have questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent to get your tax questions answered. TurboTax Live CPAs and Enrolled Agents are available in English and Spanish and can also review, sign, and file your tax return.





A Preliminary Look at 2018 Tax Data

Nicole Kaeding Anna Tyger


Erratum: Data used in an earlier version of this blog did not account for the refundable portions of the Earned Income Tax and Child Tax Credits. This data is now included.


At the end of June, the Internal Revenue Service released the first set of tax return data from 2018. These are the first numbers on the effects of the Tax Cuts and Jobs Act (TCJA), which was passed in December of 2017. The preliminary data provides aggregate information by income group on a range of topics, including sources of income as well as deductions and credits taken by taxpayers.


It is important to note that this new information does not contain data from those who requested a filing extension. For this reason, it includes only about 80 percent of total income tax liability for the year 2018.


Overall, the data seems to match expectations about changes. Let’s look at the highlights.


Tax Liability

The visual below shows that the TCJA reduced effective tax rates, or total tax liability divided by an income group’s total adjusted gross income, for all income groups in 2018 compared to 2017. Importantly, even though taxpayers throughout income groups saw a tax cut on average, individual circumstances vary.


Taxpayers making less than $20,000 experienced negative effective tax rates because of refundable tax credits, including the Additional Child Tax Credit (ACTC) and Earned Income Tax Credit (EITC). Refundable tax credits allow taxpayers to receive a refund from the government when the amount of credit they are owed surpasses their tax liability.


2018 tax data, effects of the Tax Cuts and Jobs Act, 2018 tax return data, federal tax reform impact, 2018 IRS data, federal tax reform impact, effects of tax reform


Filing Methods

One of the most significant changes introduced by the TCJA was the expansion of the standard deduction. The standard deduction in 2018 increased from $6,500 to $12,000 for single filers, and from $13,000 to $24,000 for those married filing jointly. As shown below, the percent of taxpayers who itemized went down at all income levels. Overall, the percentage of the population that itemizes decreased from 30 percent to 10 percent.


2018 tax data, effects of the Tax Cuts and Jobs Act, 2018 tax return data, federal tax reform impact, 2018 IRS data, federal tax reform impact, effects of tax reform


Tax Returns and Withholding

There was some friction during the 2019 filing season as changes to income tax withholding tables resulted in lower-than-expected tax refunds. Decreased tax returns, however, do not necessarily translate to increased tax liabilities.


Since individual-level data was not released on this topic, the graph below compares the aggregate refund returned to taxpayers in each income category before and after the TCJA. While refunds went down for some, recall that effective tax rates dropped across all income levels except the highest.


2018 tax data, effects of the Tax Cuts and Jobs Act, 2018 tax return data, federal tax reform impact, 2018 IRS data, federal tax reform impact, effects of tax reform


Child Tax Credit

The TCJA increased the amount parents receive from the Child Tax Credit (CTC). The maximum credit amount increased from $1,000 to $2,000 per child in 2018. Additionally, the income level where the CTC begins to phase out increased from $110,000 to $400,000 for married taxpayers ($75,000 to $200,000 for single taxpayers). Overall, these changes broadened the scope and increased the cost of the program.


As seen in the graph below, the expansion benefited taxpayers across the income spectrum, except for the highest levels. Due to the higher phaseout threshold, parents in higher income levels were able to claim the credit for the first time.


2018 tax data, effects of the Tax Cuts and Jobs Act, 2018 tax return data, federal tax reform impact, 2018 IRS data, federal tax reform impact, effects of tax reform


Qualified Business Income

In 2018, certain taxpayers were able to claim the qualified business income (QBI) deduction, frequently referred to as “Section 199A” or the “pass-through deduction,” for the first time. Under this provision, taxpayers could deduct up to 20 percent of pass-through business income from their taxable income.


This data is the first look at the real cost of the pass-through deduction but remains incomplete; taxpayers who qualify for this deduction tend to be wealthy business owners with complex finances and are therefore more likely to request a filing extension.


Thus far, the benefits of the deduction are skewed towards those earning high income. This is especially true when you compare the number of people claiming QBI (or “Share of Total Returns”) to the amount they receive (or “Share of Total Deduction”) across income levels, as visualized in the graph below.



2018 tax data, effects of the Tax Cuts and Jobs Act, 2018 tax return data, federal tax reform impact, 2018 IRS data, federal tax reform impact, effects of tax reform



The TCJA was historic, but not perfect. The initial data shows that the TCJA expanded the use of several credits and deductions, made the standard deduction more favorable than itemizing, reduced tax refunds, and lowered taxes for most Americans. As data on the changes continues to roll in, it will remind us that federal tax reform is far from complete.




IRS revives Form 1099-NEC for nonemployee compensation

By Michael Cohn


The Internal Revenue Service has resurrected a form that hasn’t been used since the early 1980s, Form 1099-NEC, Nonemployee Compensation, with a draft version available for preview on its website.


Since 1983, the IRS has required businesses to instead file Form 1099-MISC for contract workers and freelancers. The revival of Form 1099-NEC is part of an effort mandated by Congress in the PATH Act of 2015 to require businesses to file information returns about any non-employee compensation by Jan. 31 of each year. However, there were problems with the IRS’s processing systems because there was still a March 31 due date for any Form 1099-MISC that didn’t contain non-employee compensation.


 “To make matters worse, tax analysts reported in March that the IRS computers were unable to apply two different due dates to a batch of Forms 1099-MISC submitted,” wrote Ed Zollars of Kaplan Financial Education in his Current Federal Tax Developments blog. “So a single Form 1099-MISC in a batch submitted after January 31 that had an entry in box 7 for non-employee compensation on it would cause a notice to be issued charging late payment fees on every Form 1099-MISC submitted.”


Zollars noted that the new Form 1099-NEC contains an extra box that wasn’t on the form the last time the IRS released it in 1982 for state identifying information.


Form 1099-NEC




The element of tax reform that still haunts accountants

By Shaun Hunley


Since the 2017 reform of the Tax Code — formally known as the Tax Cuts and Jobs Act (TCJA) — was signed into law, accountants and tax professionals have been working overtime to keep up with the bill’s roughly 500 tax law changes. At the top of the list is one particularly vexing provision: the section 199A qualified business income deduction.


There have been an astounding 47 new clarifications released by the IRS to flesh out the intricacies of the QBI deduction. This April, as the filing deadline loomed, the IRS released draft forms to help compute 199A for the 2019 tax year. Despite this guidance, tax professionals are still struggling to sort through the deduction’s complexities.


The QBI deduction allows eligible taxpayers to deduct up to 20 percent of their QBI, plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Income earned through a C corporation, or by providing services as an employee, is not eligible for the deduction. Also, income from certain service businesses is not eligible for 199A if the taxpayer’s taxable income exceeds certain thresholds.


For taxpayers with taxable income below certain threshold amounts, qualifying for the deduction is seemingly simple. All you need to have is income from a qualified trade or business, but therein lies the rub: It’s not always clear what the definition of a “trade” or “business” is.


The dizzying complexities

For starters, nontraditional businesses are incredibly commonplace in today’s business landscape. The gig economy alone, which includes a swath of independent contractors — from Uber and Lyft drivers to eBay and Etsy sellers — presents a fundamental challenge to IRS auditors. Are these activities businesses, as defined by 199A (which borrows the definition from section 162 of the U.S. Code)? It’s not entirely clear.


Real estate can also add to the complexities. Technically owning rental real estate can provide a safe harbor to some types of businesses to qualify under 199A, but that comes with its own pitfalls, particularly in the age of do-it-yourself vacation rental services like Airbnb and HomeAway. The criteria for what type of rental activity qualifies under the IRS’s safe harbor guidelines are very strict. For example, the business must provide at least 250 hours of rental services per year, which requires separate, arduous record keeping on each property from clients.

All the while, high-income filers (for example, joint filers with 2019 taxable income over $321,400) who take the deduction are limited based on the business’s W-2 income and depreciable assets. Things are a little more straightforward for filers below that threshold, but tax pros need more clarity, and they need it soon.


Stuck in the middle

Unfortunately, help may not be forthcoming. That’s because it behooves the IRS to give itself some interpretive wiggle room when it comes to a deduction that can get as complex as this one. Without any existing legal precedent on certain trades or businesses (other than generic section 162 case law), the IRS will be charting new territory once it starts issuing audits on the QBI deduction, so having some room to interpret definitions of what a business is and whether or not it qualifies for the deduction will be an advantage.


That leaves accountants stuck in the middle. If they take a conservative approach and don’t take the deduction for certain business activities, their clients stand to miss out on big tax savings, which in turn could jeopardize their client relationship altogether. But on the flip side, an aggressive approach could land a company in hot water, directly in the crosshairs of an IRS audit with potential accuracy-related penalties for both the business and the preparer.


The road ahead

As the uncertainty around 199A continues, there is sure to be more debate on the matter. Tax Court cases delving into a business’s use of the deduction are a virtual certainty, and — as we approach an election year — the issue being used as a political football isn’t out of the question either.


In the meantime, that’s of little help to preparers who need to help safeguard their clients’ businesses right now, which makes for incredibly tough terrain to navigate. Until the IRS issues clearer guidance, claiming the qualified business income deduction is an exercise in copious fact-finding and careful risk management on the part of accountants and tax professionals. The key for tax pros navigating this period of uncertainty is to stay abreast of technical developments, truly understand the nature of their clients’ business activities, and keep diligent records on why each decision was made.




5 things you may not know about the lease standard

By Ane Ohm


As with any accounting standard shift, the new lease standard (ASC 842) brings momentous changes to accounting processes and financial reporting. While the main differences are well-known, I’ve taken a particular interest in the smaller nuances that live within the new standard. (Yes, I’m an accounting nerd and I love learning about and discussing all things related to leases!)

In this article, I’m sharing five of those intricacies that you may not know about the new lease standard, but that are critical to making the transition.


1. Equity likely isn’t impacted

I recently got into an argument with a potential client about this one — not the best way to start out a new relationship! And I understand where he was coming from: When changes in an accounting standard impact assets or liabilities on the books, typically the difference flows through equity. In this situation, the new lease standard is unusual in that equity is most often not impacted for initial journal entries. 

Here is the correct process to follow when transitioning leases from ASC 840 to ASC 842:

  1. Calculate your lease liability, which is the present value of all future lease payments after the initial application date.
  2. Remove existing lease balances, such as deferred rent. As you reverse these balances off the books, they should flow through the right-of-use asset, not through the equity balance as is common when implementing a new accounting standard.
  3. In most cases, the ROU asset is the lease liability, plus or minus the difference of those existing balances.

Note: As with most rules, there are exceptions depending on policy elections and other scenarios. Find those exceptions, along with common missteps to avoid when creating initial journal entries, in here. this article.


2. Watch out for embedded leases

A trickier aspect of the new lease standard is the concept of embedded leases, which frequently occurs when an organization has a service contract where an asset is part of the value provided and the use of that asset meets the definition of a lease. Embedded leases must be treated like any other lease under the new lease standard in terms of accounting.

In order to qualify as a lease, the asset must be:

  • A physical asset;
  • Controlled by the lessee, meaning the organization has the right to substantially all the economic benefits and the right to direct the use of that asset during the contract term; and,
  • Explicitly identified in the contract and the supplier does not have the practical ability or economic incentive to substitute out the asset

One example to consider is a service provider that does regular deliveries for your company. They have a fleet of vehicles, but one truck dedicated solely to making your deliveries. The truck is a physical asset and you receive substantially all the economic benefits of it, so it satisfies the first two conditions to qualify as a lease. However, if the supplier could easily substitute that truck, perhaps for a vehicle with better gas mileage, then the asset is not explicitly identified, and thus not an embedded lease.


3. No more prepaid or deferred rent

As we know, the major change brought about with the new lease standard is the inclusion of operating leases on the balance sheet. In the past, only items like prepaid or deferred rent were reflected on the balance sheet. 


To add the operating lease to the balance sheet, you need to create an ROU asset and lease liability. Existing deferred or prepaid rent balances are netted against that ROU asset and going forward, the difference between cash and the straight line expense flow through the ROU asset.


4. Banking relationships may be impacted

Many organizations did not foresee the impact of the new lease standard on their banking relationships. It makes sense, though, particularly for companies that must comply with debt covenants for a bank loan.

Although operating lease committed future payments may have been part of the organization all along, the new lease standard now adds these as liabilities on financial statements. That means financial institutions will now have more information about the company’s lease portfolio, which can affect how the bank considers credit availability and borrowing rates. Further, depending on how debt covenants are written, some organizations may find themselves out of compliance when their operating leases are added to the balance sheet.

The best approach here is early communication with financial institutions about the potential impact of the new lease standard.


5. Lease term for related parties

Related-party transactions generally receive special scrutiny, so it was expected that the same would be true for the new lease standard. In this situation, however, the Financial Accounting Standards Board clearly states that we should treat related-party leases as we would any other lease. The biggest impact of this approach is in determining lease term and renewal periods.

Though a related-party lease may in practice have unlimited renewal periods, or other assumptions due to the fact that it is between related parties, FASB says we should apply the same logic about economic incentives as we would for any lease when looking at lease term. Get more details on that here.




Uber, Lyft rides may be taxed under San Francisco measure

By Romy Varghese


Ride-hailing customers may be forced to pay a new tax in the city where the disruptive industry got its start.


San Francisco’s board of supervisors voted Tuesday to put the question of taxing such rides on November’s election ballot. The measure, which was crafted with the cooperation of hometown companies Uber Technologies Inc. and Lyft Inc., could raise $35 million a year for transportation improvements if two-thirds of the electorate support it.


The proposal, backed by Mayor London Breed and Supervisor Aaron Peskin, would impose a 3.25 percent surcharge on individual rides and 1.5 percent surcharge on shared rides that start in San Francisco, taking effect next year until November 2045. All rides in electric vehicles would have a surcharge of 1.5 percent.


The effort is aimed at raising funds to ease traffic congestion that’s been partly blamed on the proliferation of Uber and Lyft drivers in San Francisco. A 2017 report ordered by city supervisors showed that ride-hailing companies accounted for about 15 percent of intra-city trips and as much as 25 percent of downtown trips during peak periods. On a typical weekday peak time, more than 5,700 of the vehicles cruise the streets.


Breed, in an interview last month at Bloomberg’s Players Technology Summit, called the measure “a responsible tax.” Since ride-hailing vehicles play a role in traffic, “the companies need to pay their fair share in that regard,” she said.


Uber and Lyft threw their support behind the ballot initiative after working with Peskin to moderate a more onerous version that he first proposed. The companies publicly supported legislation in the California legislature that paved the way for the initiative and are helping to fund the campaign on behalf of the ballot measure.


Uber is “pleased to reach an agreement that will bring dedicated transportation funding to San Francisco,” the company said in a statement. “We look forward to working with city leaders to ensure a successful campaign in 2019.”


Lyft said it looked forward to “further collaborating with city leadership to provide the best possible transportation to both residents and visitors alike.”


Ted Egan, San Francisco’s chief economist, estimated the tax would be a “mildly negative” hit to the city’s economy, equivalent to about losing 190 jobs over two decades, although he couldn’t quantify the impact of increased spending on transportation or of ameliorating congestion. Ride-hailing drivers are unlikely to bear the burden of the levies, he said.


“Rider fares should rise, irrespective of whether the tax is explicitly included in the customer receipt or not,” his report said.

— With assistance from Eric Newcomer




4 questions to ask about life insurance

Feel confident about protecting your family's financial plan.

Key takeaways

  • Protect your family's lifestyle.
  • Ensure funding for college or to pay off debt.
  • Select the amount best suited to your family's needs.


You work hard to make sure you can provide for your family's needs and goals. Preparing for your family's future, however, means more than investing appropriately for your goals and time horizon. For many people, it also involves purchasing the right amount of life insurance to protect their family's lifestyle.


Life insurance can help reduce the financial impact on your loved ones in the event of your death. When you plan for life's uncertainties by having a life insurance policy, you provide your family the opportunity to help replace lost income, eliminate debt, pay for college, keep a business afloat, protect family wealth, or address other financial needs and goals while they adjust to a new life.


1. How does life insurance work?

A life insurance policy provides a payment in the event of your death that can help protect your family's lifestyle in the absence of your earning power. "Many people have financial goals they are trying to meet with hard-earned income—such as paying off a mortgage, putting a child through college, or supporting an elderly parent. Life insurance can help support your family goals," says Tom Ewanich, a vice president and actuary at Fidelity Investments Life Insurance Company.


Here's how it works: When you purchase a life insurance policy, you’re buying a contract with the issuing insurance company. The issuing insurance company guarantees, subject to the insurance company's claims-paying ability, that upon your death it will pay your beneficiaries a preset amount that is typically free from income taxes. Your beneficiaries receive the payment directly from the insurance company, so the funds arrive without the delays and expenses associated with the probate process that governs assets passed down via a will. And because the probate process is often made public, life insurance may also provide your family a non-financial benefit: privacy. However, depending on the size of your estate, benefits from a life insurance policy may be subject to estate tax.1


2. What types of life insurance are available?

Life insurance policies fall into 2 general categories: term and permanent. A term insurance policy covers a specific period of time, such as 10 or 20 years. At the end of that period, you normally stop paying premiums and your coverage ceases. A permanent insurance policy covers you until your death, regardless of age—so long as premium payments are up to date. Unlike term, permanent insurance generally includes an investment component along with the insurance policy, and carries higher premiums as a result. Permanent insurance is commonly used for wealth transfer and estate planning purposes, while term insurance is used for replacing lost income in the event of premature death.


Term insurance is generally more affordable, and in many cases more appropriate, for most purchasers. "Term insurance allows you to gain access to life insurance with a lot less money than you'd need if you were trying to buy the same amount of permanent insurance," says Ewanich.


3. When is the right time to buy life insurance?

Many people could benefit by having life insurance. "When someone else is depending on your income, there's generally a need for life insurance," explains Ewanich.


You may already have life insurance coverage through your employer. Even so, it's usually a good idea to consider purchasing additional coverage independently, because policies you buy outside an employer's plan are portable, meaning your coverage continues even if you lose or leave your job. Also, your employer's coverage may not meet your financial obligations for adequately protecting your family.


It's a good idea to review your need for life insurance whenever a major life event occurs, and also bear in mind that generally the younger you buy it, the less it will cost you. Consider the following events and the ways in which life insurance might help protect your family in each scenario:


  • New home purchase or major home improvements. Life  insurance can cover your mortgage or home equity obligations in the event of your death.
  • Marriage. A wedding should prompt you to review your entire financial situation, including your income needs, debt, and other liabilities, and to add a layer of protection for both spouses.
  • Birth or adoption of a child. A life insurance policy can provide protection for your family's increased income needs, funding a college education, and any debt you may have taken on.
  • New job. A term insurance policy can replace any group coverage you may have had from a former employer, and enable you to increase your coverage amount in accordance with your new salary.


For families with children, if one spouse is staying home, it may be important to have life insurance for that spouse in addition to insuring the primary wage earner. Consider the value of the stay-at-home parent and the services they provide. If a premature death were to occur, in addition to being a devastating loss, it would put a tremendous financial strain on your loved ones and might impact the working spouse's ability to continue to earn the same living.


Term life insurance can cover future college expenses, funeral and estate expenses, and even business ownership needs. (Small businesses may wish to consider purchasing life insurance policies for key individuals, such as an owner or top employee, to help prevent financial distress if that person were to die.)


Meanwhile, you can use permanent life insurance to help manage federal and state estate taxes, or as an efficient way to transfer wealth to heirs.


As you consider purchasing life insurance, bear in mind that you'll generally have to provide "evidence of insurability."2 This means that before an insurer issues a policy, the company will typically require you to undergo a basic medical screening, often scheduled at your home or workplace. Generally speaking, the better your overall health, the lower your premium will be. "Many factors contribute to the price you will pay for insurance, such as your age and your health. Low blood pressure and low cholesterol, along with a healthy body weight, will typically lead to a lower price," notes Ewanich. "It's usually easier—and less expensive—to buy life insurance in your 20s and 30s than in your 40s, 50s, 60s, and so on. Sometimes health issues arise later in life that can make insurance difficult or costly to obtain."



These are hypothetical examples of events one may experience during their lifetime and are for illustrative purposes only.


4. How much life insurance do you need?

There are several ways to go about determining how much coverage you need. One simple method is to buy coverage equal to 5 to 10 times your annual salary, bonuses, etc. Following this rule of thumb, if you make $50,000 annually, you'd buy a policy between $250,000 and $500,000.


Other methods are more precise and take certain aspects of your financial situation into consideration, such as the capital you've already accumulated, the liabilities you've accrued, and the specific costs for which you’d like your family to be covered in the future.


"We believe that the amount of insurance you need is tied to the annual income you would need to replace in the event of a premature death," says Ewanich. "If you can afford to retire—meaning you no longer need to work to support yourself and your family—then you may no longer need term insurance. However, most people who are in their working years aren't in a position to afford to retire, and need coverage."


One of the major benefits of term life insurance is its ability to protect your loved ones at an affordable price. Take care to avoid buying a policy with premiums you may not be able to afford in the future. "It's better to buy a smaller policy with premiums you can comfortably afford than to buy a bigger policy that you have to let lapse because you can’t pay the premium," says Ewanich.


Finally, those who may be subject to federal and/or state estate taxes may want to consider permanent insurance. The life insurance proceeds can be used to help pay estate taxes rather than forcing the liquidation of family assets.


As your life progresses, you will likely accrue greater financial responsibilities for your loved ones. Term life insurance can provide the money they need to help meet their expenses and maintain their standard of living.




Working in retirement: A rulebook

See how to tap into financial, health care, Social Security, and other benefits.

Key takeaways

  • It may make sense to continue working past age 62, so you can contribute more to your 401(k) and other retirement savings accounts.
  • If you're exploring "second act" employment, consider seeking employment opportunities that offer health insurance for your "retirement job."
  • For many people, working in their 60s and beyond isn't primarily about paying the mortgage and paying down debt; it's about doing something where you can use your knowledge, skills, and experience to be productively engaged and have some fun too.



For 67-year-old Marilyn Arnold, finances played a role in her decision to keep working when she retired 4 years ago from her position as a managing partner at New York Life Insurance Company after 29 years in the insurance business.


"I felt that if I could continue to work doing something I wanted to do and not have to start taking Social Security, or draw from my retirement funds too much, it would be a win all around," she says.


Tapping into her childhood love of sewing, she opened her own small business, Marilyn Arnold Designs, in Lee's Summit, Missouri. Her forte: creating pillows and blankets as keepsakes made from wedding gowns.


Many older Americans are continuing to work during retirement for a plethora of reasons—from a personal reward like rediscovering a childhood passion and staying socially connected with a network of people to doing something that provides a sense of purpose and a chance to give back.


A paycheck, too, is a silver lining for many workers who worry that they will outlive their money. Many people want to continue working well past "normal retirement age." But intentions and reality don't always match when it comes to working in retirement. In fact, according to a Fidelity-sponsored survey, only 3% of pre-retirees and 32% of recent retirees surveyed said they wanted to retire at or before age 60. Most wanted to keep working. However, 38% of recent retirees actually retired at or before age 60–many because of layoffs or forced early retirement. Bottom line: Far fewer people actually work in retirement than say that they want to work in retirement.


For some, saving more money for retirement earlier in their career may be a smart move, especially if they leave the workforce earlier than planned.


"People are clearly concerned about not having enough savings to last for their lifetime, especially since we're living longer, on average," says Chris Farrell, author of Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community, and the Good Life. "For many people, earning an income well into the traditional retirement years shores up household finances. Their goal is to preserve their quality of life with age."


The payback can be far more than purely financial, though, even if finances are a primary incentive. "The activity of working, of using your brain, of interacting with others is extremely valuable for your health and your happiness," says Steven Feinschreiber, senior vice president of research in Fidelity's Financial Solutions, Inc. "Research suggests that working can actually help you live a longer and healthier life."


Read Viewpoints on Ready to work after your primary career ends?


Regardless of why you decide to keep earning a paycheck in retirement, there are certain financial rules and regulations to keep in mind.


Contributing to retirement accounts

A key advantage of ongoing income is that you can regularly contribute to your retirement savings accounts, says Farrell.


For 2019, total contributions to all your traditional and Roth IRAs can be up to $6,000 ($7,000 if you're age 50 or older), or your taxable compensation for the year, if your compensation is less than this dollar limit, per Internal Revenue Service rules.


One caveat: You can't make regular contributions to a traditional IRA in the year you reach 70½ and thereafter. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age. You must also take the required minimum distribution (RMD) from your traditional IRA beginning at 70½, regardless of your work status. If you have a Roth IRA, RMDs don't apply to it during your lifetime.


Your 401(k), or similar employer-based retirement plan, is a different story. In general, you can continue stashing away money in your current employer-provided plan as long as you're still working there, even part-time. And you can delay taking your RMD until after you retire. You will, however, need to take the RMD from any former employer's plan beginning at age 70½, unless the money was rolled into your current employer's plan.


Employees may contribute up to $19,000 to their 401(k) plans in 2019, with a higher total contribution limit (employer plus employee) of $56,000. For those age 50 and older, an additional "catch-up" employee contribution of up to $6,000 is also allowed. "To have enough money to pay for your expenses in retirement, we generally recommend saving at least 15% of your income per year," explains Feinschreiber. "That's total—your contributions and your employer's combined, and assumes working to age 67. It may make sense to continue working past age 62, so you can contribute more to your 401(k) and other retirement savings accounts."


Social Security benefits

Another plus of working longer is that you can delay filing for Social Security benefits. You can begin taking monthly Social Security retirement benefits at age 62, but the amount will be reduced by about 30% versus the amount you would receive if you wait until you're what Social Security calls full retirement age (FRA)—66 or 67 if you were born from 1943 to 1959; 67 if you were born in 1960 or later.


If you can delay Social Security beyond FRA, your Social Security benefits are boosted by 8% a year (over the amount at FRA) for every year you postpone receiving checks from your FRA to age 70. That's a powerful boost.


Earning income after you reach your FRA or older doesn't affect your benefits, no matter how much you earn. For those who opt to apply for benefits before they reach FRA and continue to earn income, there's a temporary hitch. By law, if you're younger than FRA and receiving Social Security benefits, you can earn up to $17,640 in 2019, according to Social Security rules, without a reduction in your benefit amount.


If you're younger than FRA, and earn more than the limit, Social Security deducts $1 from your benefits for each $2 you earn above the threshold. In the year you reach FRA, $1 in benefits is deducted for every $3 you earn above a different limit. After that, there are no earnings tests and no benefit reductions based on earned income.


The "earnings" counted are what you make from your job and/or your net earnings from self-employment. These include bonuses, commissions, and vacation pay, because they're all based on employment, but do not include investments, pensions, and other retirement income, or veterans' or other government or military retirement benefits.


In truth, you don't ultimately lose any of your Social Security benefit due to earning more than the income limits. If you exceed the limit allowed from age 62 to 66, the funds you were docked will be returned to you in the form of a permanent increase that the Social Security Administration (SSA) recalculates for you. The SSA website stipulates that after you reach FRA, "your benefit amount is recalculated to give you credit for any months in which you did not receive a benefit because of your earnings."


"It can be a bit of a shock when the reduction happens," says Farrell. "But you don't lose the benefit. Most people don't understand that."


The good news is that your Social Security benefits can actually ramp up as a result of your employment after you reach FRA, because they are calculated using your highest 35 years of earnings. If your earnings after FRA would replace any of your 35 highest-earning years used to calculate your benefit, then the SSA will do a recalculation, and your monthly benefits will bump up accordingly.


Keep in mind, of course, that SSA benefit could be subject to income tax if you are also earning compensation from a job or self-employment. For more information, review the publication How Work Affects Your BenefitsOpens in a new window, on the Social Security website.


Tip: Even though your benefits are not lost from working and collecting Social Security at the same time, the earned income you receive while collecting Social Security could result in up to 85% of your Social Security income becoming subject to federal income taxes.

Read Viewpoints on Social Security tips for working retirees


Health and medical

If you're planning on your former employer picking up part of the tab for your health care in retirement, think again. Only 25% of large companies offer health care benefits to retirees, down from 35% in 2004, according to a 2017 employer survey by the Kaiser Family Foundation.


So if you're hunting for a new job in retirement, consider seeking an employer who offers health insurance while you are employed at your "retirement job." At the very least, continuing to earn some income can help defray your health care bills before and after Medicare kicks in at 65. "Health care expenses are generally one of the largest expenses in retirement," notes Feinschreiber. Couples retiring at age 65 are expected to incur $285,000 in health care costs on average during their retirement years, according to the 2019 Retiree Health Care Cost Estimate by Fidelity Investments. The estimate doesn't include the added expenses of nursing home or long-term care and assumes traditional Medicare coverage. "This is the money on top of Medicare," Feinschreiber says. "So it's thousands of dollars per year, which may be more than many people can afford. Working longer, even part-time, can help."


Read Viewpoints on How to plan for rising health care costs


Traditional pension plans

Although increasingly rare these days, you or your spouse may have qualified for a defined benefit plan that guarantees a specific benefit or payout upon retirement. Make sure you fully grasp how your benefit is determined before you decide to stay or leave your job. If you've maximized your pension income, it may give you the financial freedom to pursue an "encore" career. Some defined benefit plans calculate your benefit based only on a precise number of years you have worked for your employer. So ask your HR representative if your plan stops earning benefits after 30 years, if your benefit is frozen, or whether your pay may impact your final benefit.


In some plans, the pension benefit is calculated as a percentage of earnings during your final years on the job. So if you enter a "phased retirement" working arrangement and trim back your hours and earnings during your last few years, you might shrink your pension benefits too.

For some, staying on job later in your career may have more to do with qualifying for a retiree medical benefit. For example, you may have been offered an early retirement option at age 54. However, if you stayed on the job for another year, you may have qualified for an early retirement subsidy or other benefits at age 55 because you would have worked for at least, say, 10 years for the same employer. Do your homework and know your options.


Lastly, even if your pension benefit has stopped accumulating, you may choose to stay on the job because you want to continue your employer-sponsored health care coverage until you reach Medicare eligibility at age 65.


Tip: Watch a short Fidelity Learning Center video: Choosing your pension payout option

Impact on taxes

According to Farrell, it's possible that staying on the job an extra couple of years might push you into a higher tax bracket, especially if you begin to take taxable distributions from your IRA, or other pension benefits that count as income on top of your salary.


Employees can avoid being tripped up by knowing how close their current earned income level may be to the next tax bracket, advises Feinschreiber. If you need more money to live on than you're earning, or are required to take an IRA distribution, try to avoid using any other tax-deferred accounts (that don't yet require a distribution). Instead, consider taking remaining funds from your after-tax accounts, such as your checking accounts, savings accounts, or brokerage accounts, for which the bulk of the money has already been taxed.


Read Viewpoints on Tax-savvy withdrawals in retirement


For many people, like Arnold, the main thing about working in some fashion in their 60s and beyond isn't truly "about paying the mortgage and getting rid of debts—though that can be part of it—but it's typically, ‘Let's do something where I can use my knowledge, my skills, my experience, and have some fun,'" Farrell says.




Corporate America extracts cash from Bermuda after tax change

By Laura Davison

U.S. corporations brought back offshore profits in record numbers last year with nearly half of the repatriated funds coming from low-or-no-tax countries where companies had stashed cash prior to the 2017 tax law.


Nearly half of the cash U.S. multinationals brought back onshore during 2018 came from Bermuda — $231 billion — and the Netherlands — $138.8 billion, according to figuresreleased by the Commerce Department’s Bureau of Economic Analysis Wednesday. Ireland was the third largest source of repatriated cash, but the value is suppressed because of confidentiality rules in the country, according to the report.


The data give one of the first indications at how U.S. companies are deploying cash globally following an overhaul of the U.S. tax system, which cut the corporate tax rate to 21 percent from 35 percent and changed how the Internal Revenue Service taxes overseas corporate profits.


The figures show that chemical manufacturers and electronics producers — both industries that have historically relied heavily on offshore subsidiaries for tax purposes — brought back the most. The data also show U.S. direct investment abroad decreased by $62.3 billion to $5.95 trillion in 2018 as a result of companies repatriating cash.


The data give lawmakers a sense about how much the law, which overhauled how global companies pay taxes, changed corporate behavior.


“Repatriation activity going forward will probably look different,” said Gordon Gray, director of fiscal policy at the American Action Forum. “You’ll see net disinvestment from tax havens and more dividends” from where customers and manufacturing facilities are located.


U.S. corporations brought back about $876.8 billion over 2018 and the first quarter of 2019, according to Commerce Department figures released last month. That’s a fraction of the $4 trillion that President Donald Trump said would be returned to the U.S. as a result of his tax law.


Tax Avoidance

Companies had kept much of their overseas profit offshore to avoid a 35 percent tax that kicked in when they brought the money back to the U.S. The Republican tax law set a one-time 15.5 percent tax rate on cash and 8 percent on non-cash or illiquid assets repatriated to the U.S., regardless of where the profits sat.


Going forward, companies generally only pay U.S. taxes on the profits they earn domestically. However, the law included some exceptions, that means they can still owe on foreign profits. The global low-tax-intangible income levy, or GILTI, in the law was meant to keep U.S. corporations from stashing profits in low-or-no tax countries.


Economists and some tax lawyers have said GILTI actually encourages companies to earn money overseas, the opposite of Congress’s intention. Policymakers in Congress and the Treasury Department are closely watching how companies react to the law to see if there are unintended holes that allow corporations to minimize their tax bills.


Many corporations asked the Internal Revenue Service for more time to file their tax returns for 2018, the first under the new tax law. Once those are filed, it can take years for auditors and companies to resolve disputes about how much tax they owe.

Bloomberg News




Polygamists admit $512M fraud for fuel-tax credit

By David Voreacos


Four family members belonging to a Utah polygamist group admitted defrauding the U.S. of $512 million in renewable-fuel tax credits, with the leader saying the mastermind was an Armenian immigrant who owns a small oil and gas empire in Southern California. That businessman now faces trial alone.


The leader, Jacob Kingston, who was the chief executive officer of Washakie Renewable Energy LLC, pleaded guilty July 18 in federal court in Salt Lake City. He said his company falsely claimed that it produced or blended biodiesel fuel to qualify for tax credits. He also admitted laundering more than $100 million in fraud proceeds in Turkey, obstructing justice and tampering with witnesses.


Kingston is a member of the Davis County Cooperative Society, which is known as the Order and is one of the largest Mormon polygamist clans in the U.S. In agreeing to pay back the $512 million, the Kingstons will forfeit their WRE plant along the Utah-Idaho border, dozens of properties in Utah and Turkey, several luxury cars and various bank accounts.


“We are hoping that he and his family are shown leniency by pleading guilty before trial,” said Marc Agnifilo, a lawyer for Jacob Kingston. “He just wants to get this situation behind him.”


The other Kingston family members who pleaded guilty in the largest biofuel-fraud case ever in the U.S. were Jacob’s brother, Isaiah, the company’s finance chief; his wife, Sally; and his mother, Rachel. In pleading guilty, Jacob Kingston said the fraud began in 2010 but accelerated at the direction of Lev Dermen, who owns a string of California gas stations and truck stops and was indicted with the Kingstons.


“In early to mid-2013, at the direction of Lev Dermen, I began to file false claims in larger and larger amounts,” Jacob Kingston said in court papers. “Dermen not only directed me on what amounts to file for, which would be protected by his ‘umbrella’ of federal law enforcement contacts, but he also agreed that I should use my staff and contacts to create fake business transactions.”


Dermen, who’s been in custody since August, has pleaded not guilty and denies playing any role in the fraud or money laundering. An attorney for Dermen, Mark Geragos, didn’t respond to requests for comment about the guilty pleas.


Dermen had been scheduled to face trial with the Kingstons on July 29. At a hearing on Monday, a judge set a tentative trial date of Aug. 19, court records show.


Trial acquittals

Dermen fled Armenia with his parents and older brother when he was 14, settling in Los Angeles. He dropped out of Hollywood High School in the 10th grade to work at the family gas station, eventually building a prosperous string of businesses. Dermen was previously acquitted at trials accusing him of fuel-excise-tax fraud and assaulting a police officer.


In arguing that Dermen should be locked up pending trial, prosecutors argued that he projected an air of menace that intimidated witnesses. Dermen also drove in armored vehicles and traveled with security. Geragos said in court filings that Dermen needed such protection after a July 2016 incident in which a gunman ambushed a car carrying Dermen’s son, thinking Dermen was the passenger. Dermen’s son wasn’t hit, but the driver was shot five times and survived.


Dermen has frustrated investigators for years. In 2017, a Los Angeles task force suspected him of biodiesel fraud and raided his home and businesses, seizing potential evidence, including his $1.7 million Bugatti Veyron. Geragos persuaded the judge to return what was seized. Prosecutors later ended that investigation as the Utah probe progressed.


In his guilty plea, Jacob Kingston said that Dermen directed him on buying biodiesel that wasn’t eligible for $1-a-gallon tax credits from the Internal Revenue Service or for renewable identification numbers, or RINs, that correlate to fuel batches and can be traded.


Rotating fuel

Kingston admitted he worked with co-conspirators to create fake business transactions to make it appear as though his company produced or purchased fuel that qualified for tax credits or RINs. One such scheme involved rotating at least 100 million gallons of fuel among tanks in Texas, Louisiana and Panama, he said.

With the fraud proceeds, Kingston and Dermen bought property in Belize for a casino and land in Washington State to open a marijuana grow house, Kingston said. Dermen bought a Utah mansion for Kingston, and Kingston bought Dermen the Bugatti, court papers show. Both men owned a lender called SBK Holdings USA, but Dermen controlled it, Kingston said.


Dermen directed Kingston to buy him a luxury house in Huntington Beach, California, transfer $70 million to Turkey for investments, and remain as the nominee owner, court papers show.

“Dermen instructed me to keep some of this money and investments in my name as his ‘white boy’ face of his Turkish investment activities,” Kingston said.


The plea deals cap Jacob Kingston’s prison term at 30 years, Isaiah’s at 20 years, and Sally’s and Rachel’s at 15 years.


Fraud proceeds

In his guilty plea, Isaiah Kingston admitted that he and his brother “cycled” fraud proceeds through at least 10 Order-related businesses and then returned the money to Washakie’s bank accounts by falsely calling them loans or profits.


The 10,000 members of the Order control more than 100 businesses in the West, including a casino in Southern California, a cattle ranch on the Nevada border and a tactical-arms company that specializes in semiautomatic weapons. Prosecutors said the Order had engaged in many crimes through the years, and Bloomberg Businessweek spoke to 10 current and former members in detailing its practices.


“The Order also promotes a practice of ‘bleeding the beast,’ wherein Order members are encouraged to obtain as much money as possible from local, state and federal government agencies for the benefit of the Order, because of the fear that the government will seek to punish them for their way of life,” prosecutors said last month in court papers.


On June 17, Jacob’s lawyers asked the judge to bar any reference at trial to the Order or the practice of polygamy, arguing that it could inflame the jury.


“Even assuming the polygamy evidence was relevant (which it is not), the risk of prejudice is even greater in this case considering how emotionally and politically charged the issue of polygamy is and has been in Utah,” according to the filing.

Bloomberg News




One change at the IRS could be a huge win for CPAs

By Amy Pitter


Most CPAs agreed — this year was the worst tax season in memory.


Tax reform created new rules and regulations that were unfamiliar at best, and often poorly thought out, inconsistent and confusing. In addition, CPAs had to deliver a lot of bad news to their clients. Even though tax reform provided relief to some, it generally wasn’t felt that way. Many people were paying less in taxes over the course of 2018 — incrementally fewer dollars in withholdings — yet faced a tax bill or were looking at a much smaller refund when it was time to file. It was a reality check, and many taxpayers had ended up owing money for the first time. The withholding guidance, in some cases, proved to be too aggressive, ultimately rocking the expectations of many people accustomed to receiving refunds.


As CPAs struggled to keep up, they looked to the Internal Revenue Service for assistance. Instead, the agency was part of the problem. In a time of tremendous change and confusion, the IRS remains woefully understaffed and underfunded, and was overwhelmed with requests for clarification on many new tax treatments. In many cases, taking an extension was the only way to go — several new provisions required more information than was available for filing time.


The agency, to its credit, kept pumping out information to stay on top of the myriad and often highly technical changes to the law, and has been more active in engaging with the tax community with regional meetings and other communication. That said, the IRS still has a long way to go to upgrade and reorganize. This year, the IRS still employed the “courtesy disconnect,” which means that after being on hold for hours, in some reported instances, they disconnect the call, perhaps to spare any more pain of waiting.


Providing taxpayers access to the information they need to file a complete and accurate return is the single biggest factor in increasing both compliance and tax revenue – more than audits, more than collection activities. If there’s one clear takeaway from tax reform, it’s the need to modernize how the IRS interacts with both professionals in the tax industry and the public.


The IRS is beginning to embrace the need to modernize, and in fact, it recently announced its IRS Integrated Modernization Business Plan. The plan is loaded with complicated, long-term, expensive but necessary steps. Missing from the plan is a simple, cost-effective and potentially very effective change — the creation of a Practitioner Services Division, which would, among several improvements, provide a secure online portal for tax practitioners to access all clients’ information to facilitate the flow of taxpayer data. IRS Commissioner Charles Rettig recently said he understands the need for such a division, spreading some hope for CPAs everywhere.


Current practitioner services are fragmented and inefficient. Each practitioner represents hundreds if not thousands of taxpayers, and time spent educating practitioners and solving their problems in a holistic and complete way has exponential ripple effects throughout the taxpaying community. A consolidated Practitioner Services Division is the right direction to achieve this goal.


Next tax season promises to be better. Practitioners are now wiser by one crucial year, and so, too, are clients. You can bet withholding tables will receive extra scrutiny. But it remains for Congress to recognize the potential of the IRS, and the valuable return on investment in funding the agency at appropriate levels, and it remains for the IRS to make a simple change that will not only benefit practitioners, but also the millions of taxpayers they serve.




Ransomware attack hits QuickBooks cloud hosting provider Insynq

By Ranica Arrowsmith


Insynq, a provider of cloud hosting for QuickBooks products, was hit with a ransomware attack on July 16, making it the second cloud hosting provider in the accounting space to have experienced a security event this year — in May, Cetrom experienced a similar attack.


On July 19, Insynq informed its customers that the attack three days earlier was perpetrated by “unknown malicious attackers.” According to the company, the attack impacted data belonging to some Insynq clients, rendering this data inaccessible. Inqync reports that as soon as it discovered the attack, it “took steps to contain it,” including taking some servers offline to protect client data and backups.


Insync also reported it has engaged cybersecurity experts for assistance, and is “working as quickly as [it] can to restore access to all impacted data.”


“We are working diligently to ensure backups are available to you once we have addressed the underlying problem,” Insynq’s statement tocustomers reads. “We are taking extreme measures to get your data and environments back up and running as soon as possible. To manage expectations, it is unlikely that we will be able to accomplish this today. We’ll continue to follow up as we have more clarity on the situation.”


Ransomware is a type of malware that encrypts data so that hackers can ask for a ransom in exchange for de-encryption. To give an idea of how expensive this can be, a Florida city, Riviera Beach, is preparing to pay $600,000 to hackers who deployed ransomware into the city’s computer systems earlier this year. The money will come from the city’s insurer, but there is no guarantee that it will get its data back after payment.


Cetrom, the hosting provider that went through a malware attack earlier this year, took all of its systems down as a precaution while it worked on finding the source of the breach and safeguarding its data from compromise. The same thing happened to CCH, a suite of accounting products under the Wolters Kluwer Tax & Accounting umbrella, in May. CCH took its products offline for a few days between May 6-10, with products being put back online piecemeal as it was deemed safe to do so.


It’s important to note that as far as has been reported, in each of the earlier cases, no data was compromised or lost. Thus far, it is unclear whether this is the case with the Insynq breach. Insynq has specifically called this a ransomware attack, while the Cetrom and CCH incidents were identified as malware, an umbrella term for any malicious code that is harmful to computers.


Beyond the official statement on its website, Insync has not communicated with its customers, and in turn, customers have taken to social media to complain. But this response makes sense for a company scrambling to understand a cyber-incident and restore its systems. Oftentimes, sending out minute-to-minute updates can be confusing, and can also have insurance and legal implications. For now, customers should expect relative silence from the company until concrete progress has been made.




House vote to repeal Obamacare tax shows health care tension

By Laura Davison


The House voted overwhelmingly to repeal a tax Wednesday intended to fund the Affordable Care Act, preserving tax breaks for employer-sponsored insurance plans favored by large corporations.


In a reversal of the usual partisan roles, Democrats rather than Republicans led the charge to kill a key part of Obamacare.


The bill to repeal the levy commonly known as the “Cadillac tax” passed 419-6 with bipartisan support. The 40 percent excise tax on the most generous and expensive employer health-insurance plans was included in Obamacare as a measure that economists said would help curb health costs.


Congress kept delaying its implementation so the tax has never actually been collected. Had it gone into effect, it would have hit about one in five employers that offer health benefits to their workers, according to estimates from the Kaiser Family Foundation.


The vote to repeal the tax highlights the conflicting forces pulling at Democrats when campaigning versus legislating.


Several of the party’s presidential candidates led by Senators Bernie Sanders and Elizabeth Warren support replacing nearly all private insurance with a government-run system financed by tax increases. Former Vice President Joe Biden, the front-runner in the race, has a less sweeping plan to bolster Obamacare, but it still would offer a public health insurance option funded by tax hikes on the wealthy.


But in Congress, Democrats and Republicans are facing pressure from labor unions and large companies to move in the opposite direction by keeping tax advantages for employer-sponsored plans. Supporters of repealing the tax say keeping it in place would force employers to offer less generous health insurance to their workers.


Employers can reap large tax savings by compensating their employees in the form of more extensive health insurance, rather than wages, which are subject to payroll taxes. Employer-paid premiums are exempt from federal income and payroll taxes, and the premiums employees pay are also often excluded from taxable income.


Changing Minds

“I’ve been a supporter of the Cadillac tax because I thought it would” lower health care costs, said Representative Steny Hoyer of Maryland, the No. 2 Democrat in the House. “But I’ve read some additional material on it and it’s obviously overwhelmingly thought this will not have the effect in terms of raising money or controlling costs that I thought it would have.”


The dissonance among Democrats about whether to expand or shrink employer-sponsored health coverage makes them look like “gymnasts,” said Representative Mike Kelly, a Pennsylvania Republican.


“Where are you on this stuff?” he said. “Wait a minute, you’re all advocating that there be no such thing as employer-sponsored coverage.”


The repeated delays in imposing the Cadillac tax delays mean that Congress was never able to test whether it would curb the explosion of health care spending, which has risen an average 4.2 percent every quarter between 2010 and 2018, according to data from the Kaiser Family Foundation.


The repeal also would mean that the Treasury Department won’t collect the $201 billion the Joint Committee on Taxation estimated it would raise over a decade.


Obamacare Taxes

Obamacare included several other tax increases, including a 3.8 percent tax on investment income and a 0.9 percent levy on wages for top-earners. The portion of the law that was supposed to be financed through the Cadillac tax instead would be paid for through deficit spending, unless lawmakers propose a last-minute tax increase to offset the cost.


Democrats have generally opposed measures to chip away at President Barack Obama’s signature legislative achievement, but the Cadillac tax has been unpopular since it became part of the code.


The measure to repeal it, H.R. 748, was passed under a fast-track procedure requiring two-thirds support among House members.


Yet popularity doesn’t necessarily mean good policy, said Marc Goldwein, senior vice president at the Committee for a Responsible Federal Budget. Politicians don’t like the tax on health benefits, but nearly every economist thinks the Cadillac tax or a similar measure is necessary to help slow the rise in health-care costs and curb overuse of health services, he added.


“Just because it’s bipartisan doesn’t mean it’s good,” he said.


Not all Democrats are on board with eliminating the tax. Representative Ron Kind, a Wisconsin Democrat, said he opposes the repeal because the cost isn’t offset and there wasn’t any discussion about how scuttling the tax would affect the Affordable Care Act overall.


“I think we are lapsing into some very bad habits in the majority,” he said. “We need to start instilling some fiscal discipline in this place and making some tough decisions.”


Senate Majority Leader Mitch McConnell, a Kentucky Republican, hasn’t committed to addressing the issue in his chamber. Because the repeal effort is led by Democrats, it sets up a path for McConnell to use it as a vehicle to attach Republican tax priorities, such as correcting errors in the 2017 tax law or extending several expired tax breaks that benefit the biodiesel and energy industries.


“We’ve kicked the can down the road for so long on this one that the assumption is that it’s never going to go into effect,” said Representative Dan Kildee, a Michigan Democrat. “There’s a certain inevitability to this one getting repealed.”

— With assistance from Emily Wilkin




More questions about how Jeffrey Epstein got island-owning rich

By Joe Nocera


Ever since the release of the movie “All the President’s Men,” journalists and investigators have taken to heart the advice Bob Woodward got from his famous source Deep Throat: “Follow the money.” But few people have made that as difficult as Jeffrey Epstein, who today sits in jail, accused of sex-trafficking underage girls.


(Disclosure: My wife, who runs a small public relations firm, is representing a number of Epstein’s accusers. Her work does not touch upon Epstein’s finances.)


Instructed by the court to list his assets, Epstein turned in a financial disclosure form claiming a net worth of more than half a billion dollars. He listed $379 million in cash and investments, and valued his six (yes, six) properties at $181 million. There were no further details. At Monday’s bail hearing, U.S. District Judge Richard Berman described the document as “cursory” and unhelpful.


In the short term, the judge and the government need a full accounting of Epstein’s wealth as part of the bail determination. As Assistant U.S. Attorney Alexander Rossmiller put it during Monday’s hearing, “The first question for a defendant of this tremendous means is how much money does he have, where is it, what are the accounts, is it in foreign accounts, how much is in diamonds and art.” He added, “These are all details that would be necessary for the court to consider” in the bail application.


Plainly, the government will need to dig deep to gain a complete understanding of Epstein’s wealth. Under the criminal forfeiture statute, it has the right to take any asset that can be connected to a crime — in Epstein’s case, his properties, if it is proved that underage girls were abused there. It will also want to know if he acquired any of his wealth from trafficking. That money could also be taken away by the government.


Finally, the accusers will want to know the details of Epstein’s wealth because many of them will undoubtedly seek money damages via lawsuits. Paul Cassell, a lawyer representing one of the victims, told the Washington Post that “it’s easy to foresee 160 victims in this case and possibly more.” He added that Epstein’s “exposure” from such lawsuits could exceed $1.5 billion.


How difficult will it be to dissect Epstein finances if he doesn’t cooperate? Pretty hard. His primary charitable foundation, the J Epstein VI Foundation — which made grants to scientists, including the $6.5 million he donated in 2003 to support Harvard mathematician Martin Nowak — does not appear to have ever filed a financial disclosure form with the Internal Revenue Service, as most foundations are required to do. His company, the blandly named Financial Trust Co., is equally invisible. It has no website, no record of any transactions, and no filings with the Securities and Exchange Commission.


The lack of an SEC registration strongly suggests that Epstein never managed money for billionaires (or anyone else) as he long claimed. But after making phone calls for the last few days, I’m pretty sure he did do something useful for the superwealthy. He was a tax and estates adviser — the kind who has a knack for finding loopholes to help clients minimize their taxes. And he was said to charge a small fortune for his services.


Still, how many tax advisers do you know who have a net worth of more than $500 million, no matter how wealthy their clientele? Thus, the mystery of how Epstein became rich enough to own six properties, plus a private jet, plus all the rest of it remains just that: a mystery.


I’ve spent the last few days scouring federal disclosure documents to see what they might tell us about Epstein’s finances. Although he never registered his biggest foundation with the IRS, he routinely filed annual IRS forms — so-called 990s — for two smaller foundations. Because he was a trustee or co-trustee on a number of trusts affiliated with Leslie Wexner, the billionaire chairman of L Brands, his name shows up in virtually every L Brands 13D up until 2007, when Epstein went to prison as part of a plea deal on state prostitution charges in Florida. Although the documents offer fewer answers than one would hope for, they raise a host of questions worth pursuing. I’ve contacted Epstein’s team for a comment, but they have not responded.


What do the disclosure documents tell us about the relationship between Epstein and Wexner?


As many stories have pointed out since Epstein’s arrest on July 6, Wexner was tightly connected to Epstein. Indeed, in the two major profiles of Epstein published in 2002 and 2003 — in New York magazine and Vanity Fair — Wexner is quoted effusively praising Epstein.


(Late Monday, Wexner sent an email to L Brands’s employees saying he had been unaware of Epstein’s “illegal activities” and “regretted that my path ever crossed his.”)


In a story published Saturday, Bloomberg News documented how, after Wexner discovered him in the late 1980s, Epstein became a kind of aide de camp to the billionaire. He was a board member of several of Wexner’s foundations and the president of N.A. Property Inc., a company Wexner started to create the town of New Albany, Ohio, in suburban Columbus, where Wexner lives.


But the L Brands financial disclosure documents from the 1990s and 2000s suggest that their relationship was even closer than that. In Schedule 13D documents filed with the SEC from that era, Epstein is listed as a trustee — sometimes with Wexner, sometimes by himself — on a handful of Wexner trusts, including several for Wexner’s children. Some of the transactions in the 13Ds raise the possibility that Wexner may have paid Epstein by letting him sell L Brands stock out of those trusts.


For instance, in a 13D filed in late March 2002, Epstein is listed as trustee or co-trustee for the Wexner Children’s Trust II, which held 1.3 percent of L Brands stock, as well as something called Health and Science Interests II, which held 3 percent of the shares. (Wexner himself held 15 percent of the stock.) The document shows that on March 26, Wexner moved 15 million shares, worth over $250 million, from the Wexner Children’s Trust, which he solely controlled, to the Health and Science Interests II, where he was a co-trustee with Epstein. The next day, Health and Science Interests II sold 49,800 shares at $17.50 a share.


It is possible that the sale was simply a diversification move — though, as I noted earlier, Epstein had never registered with the SEC as an investment professional. It seems more likely that it was a way to put money in Epstein’s pocket. There are a half-dozen 13Ds that show a similar pattern: Wexner transfers L Brands stock from trust he solely controls to one where Epstein is a trustee. Within days, the Epstein-managed trust sold the stock. (An L Brands spokesperson would not respond to any questions about Epstein’s involvement in Wexner’s trusts.)


It is impossible to know for sure whether the proceeds from those stock sales wound up in Epstein’s pocket, because we don’t have access to his tax returns. But it is a very real possibility.

What can we learn about Epstein from his foundation disclosures?


For more than a decade, Epstein had a foundation called the C.O.U.Q. Foundation Inc. At its peak it had more than $20 million in assets. There’s no particular theme to Epstein’s donations: In 2002, for instance, according to the C.O.U.Q. 990, he gave $400,000 to the Institute for Advanced Study, $50,000 to the University of Maryland, $50,000 to the Nelson Mandela Children’s Fund, and $25,000 to the Edge Foundation, an offbeat nonprofit where he was friends with its creator John Brockman.


What is striking about the two Epstein foundations that filed 990s is that they don’t contain any contributions from Epstein himself, despite his supposed wealth. In the case of C.O.U.Q., its entire corpus came from — you guessed it — Wexner.


In late February 2002, Wexner, through the Wexner Children’s Trust, gave the C.O.U.Q. Foundation 600,000 shares of Too Inc., worth $11.2 million. (Too Inc. was the stock of the Limited Too.) A year later, Wexner made a $10 million donation to C.O.U.Q., this time through the Wexner Charitable Fund. The three trustees of the Wexner Charitable Fund were Wexner; his wife, Abigail; and Epstein.


But why? Why would Wexner give millions to Epstein’s charity? Wexner’s best-known charity, the Wexner Foundation, was devoted to “developing Jewish professionals, volunteer leaders and leaders in Israel.” In 2002, it had a corpus of over $80 million. Wexner gives it millions of dollars every year.


So why did he feel the need to contribute $21 million to Epstein’s foundation? Was it a form of payment? Documents alone cannot answer this question. They can only raise it.


Did Epstein really donate $46 million to a Wexner foundation prior to going to prison in 2008?

Technically, the answer is yes. But the transaction is a head-scratcher. Here’s the sequence of events: In December 2007, a new foundation was established called the YLK Charitable Fund. It had two trustees: Wexner’s wife, Abigail, and Peggy Ugland, a longtime Wexner employee. This took place two months after Epstein had agreed to his now infamous plea deal in Florida. Few people knew about the plea, however, because the agreement was still under seal.


In January 2008 — one month later — Epstein transferred $46 million to Abigail Wexner’s new foundation, $14 million of which came from C.O.U.Q. and the rest from Epstein’s company. Among the conditions: YLK had to account for Epstein’s money “separately on its books and records.”


Just three years later, with Epstein out of prison, the YLK Charitable Fund shut down, having made exactly two donations. The money that remained — some $33 million — was then folded into yet another of Wexner’s foundations, the Wexner Family Charitable Fund.


Why would Abigail Wexner set up a foundation solely to accept money from Epstein? Why would it remain largely dormant for the next three years? What happened to the money once it was transferred to the Wexner Family Charitable Fund? Again, it is impossible to know simply from reading the documents. But it is a question investigators are likely to ask as they attempt to get to the bottom of Epstein’s finances.


Did Epstein win the Powerball lottery while he was in prison?


It’s not a completely crazy question. In August 2008, shortly after Epstein began his 13-month prison sentence in Florida, an entity called the Zorro Trust submitted the winning ticket for an $85 million jackpot. The ticket had been bought at a convenience store in Altus, Oklahoma. (The trust took the money as a lump sum, which came to $29.3 million after taxes.)


As it happens, Epstein had an entity called the Zorro Trust; he used it to make donations to politicians in New Mexico, where he had a ranch called — yep — the Zorro Ranch. (A federal prosecutor in New Mexico has begun an investigation into whether Epstein abused underage girls at his ranch.)


A few years ago, a lawyer representing some alleged victims took the prospect of Epstein winning the lottery seriously enough that he brought it up during a deposition with Epstein’s former pilot. But the Oklahoma City newspaper, the Oklahoman, did a little more digging and discovered that the anonymous winner worked in a grocery store across the street from the convenience store where the winning ticket was sold. Apparently, she decided to use the same name for her trust as Epstein did for his.


Not everything’s a mystery. Sometimes, it’s just a coincidence.

Bloomberg News




Sex toys allowed, not massages, in fine print of Trump tax break

By Noah Buhayar


Liquor stores can’t claim a hot new U.S. tax break designed to create jobs in poor communities. One of the biggest property developers for marijuana ventures says it can.


Country clubs and golf courses are barred, too — but not a wide variety of other luxury properties, such as a new hotel for visitors to Napa Valley wine country.


Massage parlors are out. But the maker of a robotic personal massager that promises “hands-free blended orgasms” just raised millions from wealthy investors planning to claim the tax break.


“It’s been great for us,” said Lora Haddock, the company’s founder.


Welcome to the quirky fine print inside President Donald Trump’s signature tax overhaul, which has created more than 8,700 opportunity zones across the country. The idea is to spur investments in areas left behind. But when crafting the law, the authors included rules from past economic-development initiatives that banned a variety of businesses deemed undesirable. Now, some are questioning whether the lines make sense.


Researchers have pointed out, for example, that the new tax break might be used by makers of cigarettes and guns, as well as mining companies, despite their increasingly controversial impact on poor communities.


“There’s an element of arbitrariness to it, for sure,” said Samantha Jacoby, a senior tax legal analyst at the Center on Budget and Policy Priorities. “If the goal is to improve economic outcomes for low-income people who tend to live in areas that have faced systemic poverty, racial discrimination and lack of opportunity, you’d be better off with public investments in infrastructure and education.”


The tax break for investing in opportunity zones is now a White House talking point as Trump gears up for the 2020 election. The generous incentives — once overlooked in the big package Republicans pushed through in late 2017 — are the talk of property developers and money managers for the ultra-wealthy. Community leaders are excited too, hoping it might reinvigorate blighted cities and rural areas.


The list of so-called sin businesses that Congress included in the law was drawn from a prior statute that also included gambling establishments, racetracks and hot tub and tanning facilities. But it was just meant as a starting point, said Steve Glickman, who helped come up with opportunity zones when he was chief executive officer of the Economic Innovation Group, a Washington think tank.


Lawmakers wanted to empower states and local authorities to steer money to areas and projects they deem important, he said. If leaders in those places want to go further, they can layer on additional restrictions.


“The ethos of this program is to push down decision-making to the local level,” said Glickman, who now runs a consulting firm for investors in the zones.


Still, the old list of sin businesses is raising new questions at a time when taboos around drugs and sex are changing.


Campus for Cannabis

Treasury Secretary Steven Mnuchin has said that businesses selling marijuana shouldn’t qualify for the incentives. But Canna-Hub, which builds facilities for California’s booming pot industry, intends to use the perk to burnish returns on a new 80-acre campus near Williams, California. The property will include buildings designed for indoor cultivators, testing facilities and edibles manufacturers.


The company began pursuing the $200 million project before opportunity zones were tucked into Trump’s tax overhaul. The site, about 50 miles north of Sacramento, happened to be in a census tract that state authorities later selected as a zone. Canna-Hub is confident it can work within more detailed rules since released by the Internal Revenue Service.


It’s only fair that they qualify, CEO Tim McGraw said. Unlike liquor, he said, cannabis has medicinal properties, relieving anxiety and pain. “If they were going to leave cannabis out of opportunity zones, they’d have to leave out Tylenol,” he said.


While country clubs are out, a wide array of other luxury developments are chasing the break. In Houston, developers are erecting a high-end residential tower featuring a “sky amenity deck” on the 46th floor. It also offers yoga lawns, shaded cabanas and barbecue grills around a swimming pool overlooking the downtown area. Others intend to use the tax perk for a new mall in Connecticut anchored by a Bloomingdale’s and a Nordstrom.


To be sure, the majority of projects slated for opportunity zones are relatively straightforward real estate developments, such as industrial parks and apartment buildings. Some investors are also voluntarily avoiding projects that create environmental or social concerns.


Haddock got the idea for her company, Lora DiCarlo, after an intensely pleasurable sexual experience when she was in her late 20s. “I thought, ‘How do I do this again?’” she recalled in an interview. Her answer was Osé, an elongated personal massager that uses micro-robotics to make what the company calls a “come hither” motion. It’s expected to go on sale for roughly $300 this fall.


Developed with technical help from researchers at Oregon State University, the device won an award from the group behind the Consumer Electronics Show. When the organizer later withdrew the honor, Haddock went public with the story, saying it demonstrated bias. The prize was later reinstated.


That publicity, paired with Haddock’s mission of promoting gender equality, has made her startup an easy sell to investors, said Doug Layman, an Oregon-based angel investor who took a stake in the company. An email address set up to attract potential backers drew interest from billionaires, and she quickly raised more than $3 million. “Really, she had her pick,” Layman said.


The venture plans to qualify for the tax break because its operations are based in two Oregon opportunity zones. And sex toys aren’t mentioned in the law’s list of exclusions.


Haddock knows the business probably isn’t what lawmakers imagined when they created the perk. But she said the company is living up to the intent of the legislation in at least one important way: It’s hiring.


“The money that we’ve been able to raise has helped a tiny startup go from literally three employees to 20 in about a year,” she said. “I can’t necessarily speak for everyone else” using the tax break, she said. But “it’s positive what we’ve done with it.”

— With assistance from David Kocieniewski

Bloomberg News




5 signs you’ve outgrown your current AP tools

By Chen Amit

Accounts payable is the most time-consuming and paper-intensive function in finance, according to the latest study from the Institute of Finance and Management. When given a list of dozens of AP challenges, the six biggest issues identified by finance leaders directly related to efficiency.

That’s not shocking. Oftentimes, AP processes stunt growth and hold companies back from reaching their full potential. Manual accounting methods and techniques lead to mistakes, inefficiencies, added costs and a lack of visibility — things that growing businesses can no longer afford to ignore.

The first step is recognizing that your current methods aren’t working. The second is implementing the right tools to optimize your clients for success. You're growing abroad


Accounts payable is always an afterthought, especially when businesses start to expand globally. But the unexpected difficulties of managing accounts payable can range from tax compliance to mitigating foreign exchange volatility exposure. 

Companies must designate the currency in which they will pay their vendors, while those with multiple subsidiaries must open bank accounts in each jurisdiction to facilitate each payment and manage internal cash flows. Foreign exchange management opens up companies to the risk of errors, while a lack of familiarity with local regulations exposes it to the consequences of non-compliance.


2. You’re adding more headcount

High-growth businesses can feel the pain of AP the hardest. There is a massive amount of data handled by an accounting team, including purchase orders, reports, contracts and invoices. Both the effectiveness and efficiency of AP impacts a business's cash position, credit score and, most importantly, relationships with suppliers and vendors. 

When the invoice volume begins to outstrip capacity, you might think the only course of action is to add headcount to keep up with demand. But, in the digital age, that might not be the best solution available to your team. According to Ardent Partners’ State of ePayables Research Survey, streamlined AP teams process invoices at a rate that's five times more efficient than other organizations — that’s a difference between $2.52 and $14.38 per invoice. With technology, AI and robotic process automation, the digital landscape is quickly evolving, and might offer significant benefits.


3. You’re struggling to close the books

The numbers aren’t matching, you’re drowning in spreadsheets, and you’re ready to throw the general ledger out the window. 

The reconciliation process is inherently tedious — you need to manually measure, doublecheck, and verify all paid and unpaid invoices at the end of each reporting period. Chances are you’ll find an error or two (or 20). Management wants to know the state of their finances, but it’s a struggle to get bank and payment data back into the accounting system for an honest view of where the business is at.

Visibility is strained, and there is a high risk of data miscalculations, lost files and security breaches. Simply put, you just can’t close the books.


4. You’re managing everything manually

When a business is growing quickly, it often makes the most fiscal sense to devote resources and time to building the company, growing revenue, and investing in marketing and sales.

But because of this, the automation of AP has been notoriously pushed to the side. Accountants have consistently noted that AP is the most time-consuming function in finance today. This error-prone process creates a ripple effect that is significant and magnified in a world where commerce is increasingly global and digital.

Spending your valuable time on manual, back-office tasks is unnecessary. It’s work that no one wants to do, and no one should have to do. In today’s landscape, accountants are financial advisors to their clients — they should be focused on scaling the business while relying on automation to do the grunt work.


5. You’re not making payments on time

It might seem simple enough — not everyone closes the books in a timely way, not everyone complies with all regulations, and sometimes vendors and suppliers just have to wait.

But that can be disastrous. With operations stalled, valuable time is not only wasted, but key relationships with vendors and suppliers can be strained. Paying accurately and on time is paramount to the success of any business. 

Late payments can create a huge bottleneck in your operations and can open the organization to a myriad of problems, including duplicate payments, negative impact on your client’s cash flow, increased cost and workload, inaccurate financial reports and a damaged reputation.




Are non-financial institutions ready for CECL?

By Scott Dietz


Banks, credit unions, insurers and other financial institutions have been focused on the current expected credit loss accounting standard and its potential impact for several years, and with good reason, as it will substantially impact the tops of their balance sheets. Banks continue to actively participate in interpreting the standard, with larger institutions well into parallel runs. Insurers are focused on CECL’s impact on investment portfolios and reinsurance receivables. Credit unions – while subject to a later implementation deadline – are largely in the throes of gearing up for the new standard.


However, that still leaves covered non-financial institutions, a group that now appears underprepared for the implications of the standard. While CECL was being finalized and implementation issues investigated, non-financial institutions were dealing with their own significant accounting changes, including revisions to revenue recognition, hedge accounting, and lease accounting. Now, as CECL nears its implementation deadline, these companies are trying to catch up, understand the impact, and determine how all of these changes will fit together and affect their bottom line.


CECL’s focus is on the details of how contracts and transactions are structured. A good example of the importance of transaction details in relation to CECL can be seen in trade receivables. At first glance, there does not appear to be a significant change to the allowance for uncollectible trade receivables due to CECL. Examples from the Financial Accounting Standards Board typically advocate the use of aging schedules to determine the allowance, and that method can still be utilized.


However, CECL will bring broad changes to the allowance calculation regardless of the methodology chosen. For example, all receivables must be considered, regardless of where they are in the aging process. Therefore, as soon as a receivable has been recorded, an allowance must be calculated and allocated to it. This mirrors CECL’s sea change in the financial services industry, where a new loan must receive an allowance at the point of origination; trade receivables are subject to an analogous requirement. A second example of a more obvious change driven by the new standard is the requirement to consider future economic conditions in the determination of the allowance.


Beyond these overt changes, there are more nuanced implications that may be even more impactful if they are not considered within contracts from the beginning. For example, contracts with customers may have been set up to include short-term milestones for revenue-recognition purposes, and that may cause receivables to appear as short term and low risk for CECL.


However, CECL also requires one to review a contract’s off-balance-sheet exposure, and if not structured with this in mind, a company may inadvertently be offering credit terms to customers that might require consideration far beyond the short-term receivable. This could occur if the deal includes terms with the ability to extend the receivable in conjunction with further purchases, or guaranteed delivery of future purchases regardless of the status of the customer’s other receivables (albeit typically to a certain threshold). Or, as is common within the energy and commodities industries, contracts are often established for future purchases well in advance and extend credit terms for those purchases to the customer well before the receivable is recognized.


While neither of these situations necessarily fall into the scope of CECL, the details of the contract mean they could. If they do, an allowance will be necessary and will alter the financial impact of the contract. At the very least, the risk of these types of impacts will require contract-level analysis.




IRS drafts tax return for seniors, updates 1040 for 2019

By Michael Cohn

The Internal Revenue Service has posted a draft version of a new tax return for senior citizens, as well as a new draft version of the Form 1040 for 2019 that taxpayers and practitioners will be filing next year.


The draft version of the brand new Form 1040-SR, U.S. Tax Return for Seniors, was mandated by the Bipartisan Budget Act of 2018, according to Kiplinger’s. Among the changes are larger font sizes and the removal of the shading around some of the boxes to improve contrast for taxpayers with declining vision. The draft form also includes a Standard Deduction Chart instructing taxpayers to “add the number of boxes checked in the 'Age/Blindness' section of Standard Deduction.” An IRS official highlighted the new form during a recent IRS tax forum in National Harbor, Maryland. Along with the new Form 1040-SR, the IRS also posted a new draft of Schedule R, “Credit for the Elderly or the Disabled.”


In addition to those two drafts, the IRS also posted a new draft of the Form 1040 for next tax season. Among the changes to this year’s form, according to Forbes, are moving the signature box to page 2, spaces for entering the names of a spouse and children, the removal of the checkbox for health care coverage since it’s no longer mandatory, separate lines for the Earned Income Credit, Additional Child Tax Credit and American Opportunity Credit, and some other line items changing position.


The IRS also posted a draft versions of Schedule 1 (Additional Income and Adjustments to Income)Schedule 2 (Additional Taxes) and Schedule 3 (Additional Credits and Payments)for the Form 1040, which were introduced last tax tax season as a supplement to the shortened Form 1040 mandated under the 2017 tax law.

Form 1040-SR




IRS sends letters to 10,000+ cryptocurrency users urging them to pay taxes

By Michael Cohn


The Internal Revenue Service has started sending letters to over 10,000 taxpayers who own virtual currencies, such as Bitcoin and Ethereum, advising them to pay back taxes on any income they failed to report.


The IRS announced on Friday that it began sending the educational letters to taxpayers last week. More than 10,000 taxpayers are expected to receive the letters by the end of August. The IRS obtained the names of the taxpayers through various ongoing compliance efforts. For example, the IRS filed a John Doe summons with Coinbase, one of the largest Bitcoin and Ethereum exchanges in the U.S., in 2016, to obtain the names of all its users, although it later limited the probe to those who engaged in transactions of $20,000 or more (see IRS scales back Coinbase investigation).


There are three different types of letter being sent to taxpayers, but all three versions aim to help taxpayers understand their tax and filing obligations and how to correct previous errors. The letters also tell taxpayers where they can find relevant information on the IRS website, including which forms and schedules to use and where to send them.


"Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties," said IRS commissioner Chuck Rettig in a statement. "The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations."


Last year, the IRS announced a Virtual Currency Compliance campaign to deal with tax noncompliance related to virtual currency by doing more outreach and examinations of taxpayers. The IRS intends to stay actively engaged in addressing noncompliance related to crypto transactions through various efforts, ranging from taxpayer education to audits to criminal investigations. Virtual currency is also an ongoing focus area for the IRS Criminal Investigation unit.


Accountants and tax practitioners can help any cryptocurrency-using clients who have been contacted by the IRS. “The IRS and additional government authorities continue to focus on cryptocurrency transactions, and the tax reporting by investors engaged in such transactions,” said Tim Speiss, partner-in-charge of the Personal Wealth Advisors Group at EisnerAmper in New York. “Tax professionals have also been striving to assist investors with the proper federal and state tax reporting rules. The proper tax reporting of these transactions can be very complex. Therefore, assisting investors and taxpayers so they are in compliance with reporting rules is critical in assisting them to avoid potential penalties and interest attributable to non-reporting.”


Back in 2014, the IRS issued Notice 2014-21, which said that virtual currency is property for federal tax purposes and offered guidance on how general federal tax principles apply to virtual currency transactions. Compliance efforts follow these general tax principles, but the IRS has also been looking to update the guidance, as the cryptocurrency market has grown dramatically in recent years. The IRS plans to continue to consider and solicit feedback from both taxpayers and tax practitioners on its education efforts and future guidance.


The IRS said it anticipates issuing additional legal guidance in this area in the near future. In the meantime, taxpayers who don’t properly report the income tax consequences of digital currency transactions could be liable for tax, penalties and interest, and in some cases, may even be subject to criminal prosecution.


More information on virtual currencies can be found on




The NRA uses creative accounting to post surge in revenue

By Neil Weinberg and David Voreacos


The embattled National Rifle Association reported some good news to its supporters earlier this year: Revenue from membership dues jumped 33 percent last year to $170 million.


But that picture — outlined in its 2018 annual report circulated to supporters and analyzed by Bloomberg News — may not be as rosy as those numbers suggest, as factors other than growing member rolls may have contributed to the revenue increase.


For one thing, the NRA increased annual dues twice in two years. The group also booked much of the revenue from multiyear memberships in the first year, according to financial statements. Such an accounting tactic is permissible, but it leaves open the possibility that receipts could fall if multiyear membership numbers don’t keep pace.


“The NRA is increasingly reliant on selling long-term memberships” and counting much of the revenue the first year, said Brian Mittendorf, an Ohio State University accounting professor who has looked closely at the NRA’s finances. “A very conservative approach with a five-year membership would be to record one-fifth in the current year and defer the rest.”


An NRA spokesman, Andrew Arulanandam, said it was more effective to secure long-term memberships than to pursue renewals year after year. “Simultaneously, longer-term commitments also provide the member with significant savings over annual renewals,” he said.

Arulanandam didn’t respond to detailed queries about the NRA’s membership and accounting practices.


The annual report covers the NRA and its affiliates, providing a snapshot of the group’s health in 2018. That was before a spate of ugly battles among its leadership prompted anti-NRA vitriol and boycotts by once-loyal pro-gun blogs.


Internal Turmoil

On Monday, an influential Second Amendment supporter called on members to “de-fund” the gun-rights group by contributing the minimum possible to maintain their voting rights until the NRA replaces Wayne LaPierre, its top official.


“NRA members should be expressing themselves in the only way left that’s sure to get management’s attention — by starving it of cash,” Dan Zimmerman, managing editor of The Truth About Guns, wrote.


The internal battles spilled into public view in recent months with the departure of the NRA’s unpaid president, Oliver North, and its chief lobbyist, Chris Cox, after the group accused them of plotting to remove LaPierre. The NRA’s marketing firm for nearly four decades, Ackerman McQueen Inc., cut ties after LaPierre accused it of breach of contract.


Meanwhile, litigation costs are mounting. The NRA is the subject of an investigation by New York Attorney General Letitia James into its finances, and the group claims in a lawsuit that the state illegally discouraged banks and insurers from doing business with it. The NRA is also suing North and Ackerman McQueen. The firm, which produced the now-defunct NRATV, has countersued.


Bills related to the New York investigation and other legal matters were running $2.9 million a month, North wrote in April in a leaked internal memo.


The NRA also continues to spend more money than it takes in. Last year, expenses for the gun-rights group and its affiliates exceeded revenue by $11 million, following a $1 million deficit in 2017, according to the annual report.


The NRA’s long-formidable political power also faces challenges. After spending an unparalleled $30 million to support Donald Trump’s 2016 presidential campaign, the NRA is entering the 2020 election cycle without the marketing or lobbying power that made it such an effective force for Trump in 2016.


Under Threat

The NRA has implored its members to come to its aid by warning that the Second Amendment and their way of life are under threat, even as it has played down its financial troubles.


“On August 1, 2018, NRA membership dues will increase for only the second time in more than 20 years,” the group said in a membership letter last year. Without the higher dues, the NRA warned, it wouldn’t be able to compete in the fall election “where not only our Second Amendment rights but every freedom we cherish is at stake.”


It didn’t mention that the August dues increase would be the second in as many years. All told, the increases, to $45, have pushed up the cost of a one-year NRA membership by 28 percent since early 2016.


The NRA doesn’t officially disclose its membership, though LaPierre said in April 2018 that it had reached a record of close to 6 million. For outsiders, it’s difficult to translate the NRA’s reported membership revenue directly into membership rolls because the group offers various packages. In addition to a one-year membership, there are discounted two-, three- and five-year packages. A lifetime membership costs $1,500.


While accounting rules urge for-profit businesses to book revenues only at the time they provide a good or service in return, nonprofits have more latitude with contributions, Mittendorf said. He noted that the NRA has received a clean bill of health from its auditor, RSM US LLP.


This isn’t the first time that the NRA has front-loaded its revenue. In 2007, it started counting the revenue for multiyear memberships in the first year, minus the cost of providing benefits, like its magazines. As a result, 2007 dues revenue jumped to $229 million from $72 million the year before, according to a financial statement filed with the New York attorney general’s office.


Doubling Down

The NRA has been accounting for its long-term memberships in the same way ever since, its financial statements from the later years show. Last year, deferred revenue — which includes money to send out magazines in the future — increased nearly 50 percent to $47 million. The fact that deferred revenue is growing faster than member dues suggests that long-term memberships may be playing a growing role, Mittendorf said.


Rylance Lord, a retired pharmacist in Springfield, Ohio, joined the NRA three years ago because he supports its mission and political candidates. But after receiving repeated calls from NRA solicitors pushing him to extend his one-year membership, he’d had enough.


“I was annoyed that they wanted to add on years,” said Lord, 76. “I told them I’m not into the hard sell, so please don’t call me. When they persisted, I said ‘I’m not going to do this. Please take my name off your list.’”


Ultimately, Lord canceled his membership.

Bloomberg News




How to save for an emergency

Ask yourself 4 questions to help prepare for the unexpected.


Key takeaways

  • Save at least 3 to 6 months' worth of necessary expenses by funding your emergency savings account regularly, as you would pay a bill.
  • Consider saving in an account that pays some interest but preserves liquidity.
  • To really be prepared for anything, be sure to keep health and disability insurance coverage.



The forecast says rain? You pack an umbrella, just in case. Car has a flat tire? Good thing you keep that spare in your trunk. But what happens if your furnace or air conditioning breaks or you unexpectedly lose your job? Do you have a "just-in-case" fund set aside?


Maybe not. About 3 in 10 Americans would have trouble paying their bills in full if they had to pay for an unexpected expense of $400, according to the Federal Reserve.1 Here are 4 key questions to ask yourself to help make sure you can handle what life throws at you.


1. How much do you need?

Here's the short answer: Fidelity suggests setting aside at least 3 to 6 months' worth of living expenses. If you're single and on your own but have family backup, you might be comfortable with 3 months of savings. However, if you have a spouse, kids, and a mortgage to support, you might sleep better with 6 months or even more.


But there is a long answer. There are some things to consider that could help you customize the amount you may need to save for your situation.


Protecting yourself or your family from a potential job loss or loss of income is generally the number one reason to save for a rainy day.


But your situation may not warrant saving as much as 6 months' of essential expenses. If you could easily replace your job, saving 3 months' worth may be fine. If the opposite is true and it could be a long search to find a new job, saving up to 6 months' worth or beyond could make sense.


There may be resources available to help ease the impact of a job loss—unemployment benefits. Unemployment insurance benefits are available in all states and the District of Columbia, Puerto Rico, and the US Virgin Islands. But not all employees are eligible—your employer has to pay unemployment taxes. Nonprofit organizations, like churches and schools, are exempt from paying unemployment taxes.


Some states offer higher benefits than others. So it may make sense to factor your state's unemployment benefits into your calculations.


There are other factors that influence the level of unemployment benefits you could receive. For instance, if you have children or other dependents, your state may provide additional benefits.


Other considerations:

  • You must be physically able to work—so not disabled or collecting disability benefits.
  • You must be actively looking for a job.
  • You must have left your prior job involuntarily, without cause, and in good standing.
  • If you've received unemployment benefits within the 6 months prior to filing, your benefits may be reduced.



What about borrowing?

In some cases, borrowing to pay for an emergency might not be the worst thing. For instance, a home equity loan or line of credit could be an option.


2 caveats:

  • If you've lost income, borrowing to cover essential expenses is risky.
  • If you already have a lot of debt, relying on credit or loans in an emergency puts you further in the hole, which just makes it that much harder to get out.




2. How to come up with the cash?

There are a couple of ways to boost savings—even on a tight budget.


Think of your emergency savings fund as a bill. With rent or mortgage payments, contributing to a retirement fund, and myriad living expenses, you already have a lot to balance. But if you turn saving for an emergency fund into a monthly priority, you’ll get in the habit of contributing to it regularly.


Save an inheritance or gifts. Not everyone has a wealthy great uncle, but if yours happens to leave you some money, don’t fritter it all away. Consider using it to start your emergency fund and invest what is left over for other savings goals.


3. Where's a place to stash the savings?

It can make sense to separate your emergency fund from your spending money and other types of savings. That could mean a savings or money market account (different from money market funds). Those can be convenient and accessible options, but keep in mind that those accounts may earn less than 0.25%2 in interest.


Consider the following alternatives:


Money market funds tend to be a lower-risk place to store your cash, and generally offer better rates than your typical savings account. Unlike savings accounts, money market funds are not FDIC-insured.


Certificates of deposit (CDs) may offer even better rates than money market funds—but there is a catch. Many penalize you for taking money out before the CD matures. CDs may be a solution for a portion of your emergency fund but beware of tying up all your savings—a vital component of your rainy-day fund is liquidity.


When you need to dip into your emergency fund, consider withdrawing from more liquid accounts first. An example of a liquid account would be a savings account—your savings are easily accessed at no cost. Avoiding losses due to taxes, penalties, or market volatility is key.


Try to avoid withdrawing from retirement accounts like your 401(k) or IRA if you're not yet retirement age. You may have to pay taxes and a 10% penalty for the early withdrawal.


4. How to protect yourself with insurance?

Besides having cash that you can access in an emergency, insurance is another way to be prepared for one. Consider these 2 types: term and permanent. Just like it sounds, a term insurance policy covers a defined period of time while a permanent life insurance policy is with you until death, as long as you pay the premiums.


Look into disability insurance. Whether you have it through work or on your own, you'll want to know that you have enough in the event something happens.


Don't forget about health insurance. If you lose your job, your health coverage may go with it. Even if you are eligible for continuation of coverage through COBRA your premiums are likely to significantly increase. Factor in some additional money to cover the cost of health care, just in case.


The bottom line

There are many other circumstances besides losing a job that could require having cash on hand—like natural disasters, unexpected child care expenses, or a surprise medical bill that insurance won't cover.


You may not be able to plan for all of them but protecting yourself with insurance, having ample cash savings that are easily accessed, and keeping credit available, just in case, make a good start.


That’s one reason that Fidelity suggests establishing an emergency fund and then continuing to save 5% of your after-tax income for unexpected expenses.


Read Viewpoints on 50/15/5: a saving and spending rule of thumb


Everyone needs an emergency fund—no matter how old you are or what your income level is. And if you’re diligent about saving for it, you'll be ready for anything—rain or shine.




4 common challenges tax pros face with cryptocurrencies

By David Kemmerer


Cryptocurrency is treated as property for tax purposes in the U.S., not as currency. As a result, the tax reporting requirements for cryptocurrency look very similar to traditional stock trading: Owners incur capital gains and losses that must be reported on each taxable event. However, due to the nature of cryptocurrency and how it is transacted with, complications arise for tax professionals. This guide walks through the four most common challenges faced in cryptocurrency tax compliance.


1. Assigning cost basis

Cryptocurrency is most commonly bought, sold, and traded on cryptocurrency exchanges like Coinbase, Gemini, Bittrex and others. In a sense, these exchanges look similar to stock broker sites like Etrade or Charles Schwab that allow users to buy and invest in stocks. Instead of stocks, cryptocurrency exchanges allow users to buy and invest in digital currencies. The difference from a tax reporting perspective is the limitations that exchanges face. Because cryptocurrency is a transferable asset, and users can send and receive it fluidly from their exchange wallets, the cryptocurrency exchanges are generally unable to give users an accurate 1099-B form at year end. This form traditionally breaks down each taxable event, cost basis, and gain/loss necessary for creating Form 8949.

Because of this reporting inability, tracking cost basis across multiple different cryptocurrency platforms becomes extremely difficult for tax professionals. If your client has not been keeping detailed records, it can be helpful to use crypto tax software to automatically pull historical cost basis and fair market value for all trades and transactions.


2. Loss of access to transaction data

It is not uncommon for users to have completely lost their transaction data needed for tax purposes. In the past, exchanges like Mt. Gox and Cryptopia have shut down due to liquidity issues and left users without historical transaction data. Other times users simply lose access to accounts.

There is very little that the tax professional can do if a client has lost access to their exchange or wallet account(s) and does not have a record of the historical transactions. The best approach is to work with the client to attempt to put all the pieces together as accurately as possible, then at the end, post a manual adjusting entry to zero out the ending balances for each “lost” account. In order to do this, all the ending balances for each existing account that the client still has access to must be reconciled first.


3. Lack of clear regulation

The cryptocurrency industry is still in its infancy, and regulators still have yet to address how some of the core scenarios seen with cryptocurrencies like forks, air drops, and splits should be treated from a tax perspective. The only official guidance came from the IRS with Notice 2014-21

Because of the lack of clarity, it is up to tax professionals to interpret the law and draw parallels when able. In terms of events like air drops, many professionals who are well versed in cryptocurrency side on classifying the received cryptocurrency as income using the fair market value in U.S. dollars at the time the crypto is received.

According to IRS Commissioner Charles Rettig (pictured), further cryptocurrency tax guidelines will be released in the near future. The guidelines will focus on providing clarity for “acceptable methods for calculating cost basis, acceptable methods of cost basis assignment, and the tax treatment of forks.”


4. Difficulties with cryptocurrency tax software

Cryptocurrency tax software can be used to automatically associate historical cost basis and fair market value to crypto transactions. Tax preparers generally use these tools to import their clients’ historical trade data from cryptocurrency exchanges to then generate the reports that contain the necessary information for forms like the 8949.

Not all tax software is built equally, and common issues are seen across the board. One of the biggest challenges lies with the vast amount of exchanges and other platforms that are available for crypto users to trade or exchange tokens on. There are dozens of such platforms today, and if the tax software you are using does not directly support one, getting the historical data into the program can be tedious and require a significant amount of spreadsheet work. Manipulating data and trying to get it into the right format can chew up hours of a tax preparer’s time. Many platforms also limit the amount of data that can actually be imported. If a client has thousands or tens of thousands of trades, the software can get expensive.

Other issues deal with the actual functionality of these software platforms. As the industry continues to grow, the software tools will continue to get better and better.


In conclusion

The cryptocurrency industry is growing at an incredibly fast pace. This growth provides accountants servicing the space with a great opportunity to grow their businesses. However, before taking on clients, you should generally be aware of the implications of cryptocurrency taxes as well as the common challenges that you are likely to face when servicing clients.


Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.


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