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IRS warns against COVID-19 fraud; other financial schemes


WASHINGTON – The Internal Revenue Service today reminded taxpayers to guard against tax fraud and other related financial scams related to COVID-19.


In the last few months, the IRS Criminal Investigation division (CI) has seen a variety of Economic Impact Payment (EIP) scams and other financial schemes looking to take advantage of unsuspecting taxpayers. CI continues to work with law enforcement agencies domestically and abroad to educate taxpayers about these scams and investigate the criminals perpetrating them during this challenging time.


"Criminals seize on every opportunity to exploit bad situations, and this pandemic is no exception," said IRS Commissioner Chuck Rettig. "The IRS is fully focused on protecting Americans while delivering Economic Impact Payments in record time. The pursuit of those who participate in COVID-19 related scams, intentionally abusing the programs intended to help millions of Americans during these uncertain times, will long remain a significant priority of both the IRS and IRS-CI.”


Criminals are continuing to use the COVID-19 Economic Impact Payments as cover for schemes to steal personal information and money. Scams related to COVID-19 are not limited to stealing EIPs from taxpayers, however. CI has already seen scams related to the organized selling of fake at-home test kits, offers to sell fake cures, vaccines, pills and advice on unproven treatments for COVID-19. Other scams purport to sell large quantities of medical supplies through the creation of fake shops, websites, social media accounts and email addresses where the criminal fails to deliver promised supplies after receiving funds.
“Criminals try to take advantage of our most vulnerable times and our most vulnerable populations.  But because we have seen many of these criminals and schemes before, we know how to find them and we know how to expose them," said Don Fort, Chief of IRS Criminal Investigation. “And because COVID-19 is a global problem, it requires a global solution. Not only are we leveraging our financial investigative expertise domestically, we are working hand-in-hand with our J5 partners on those COVID-19 cases that cross borders. There truly is no place for criminals to hide.”


Other COVID-19 related scams involve setting up fake charities soliciting donations for individuals, groups and areas affected by the disease. Some criminals are offering opportunities to invest early in companies working on a vaccine for the disease promising that the “company” will dramatically increase in value as a result. These promotions are often styled as “research reports,” make predictions of a specific “target price,” and relate to microcap stocks, or low-priced stocks issued by the smallest of companies with limited publicly available information.


Finally, CI has also seen a tremendous increase in phishing schemes utilizing emails, letters, texts and links. These phishing schemes are using keywords such as “Corona Virus,” “COVID-19”, and “Stimulus” in varying ways. These schemes are blasted to large numbers of people known by the bad actors in an effort to get personally identifying information or financial account information to include account numbers and passwords. Most of these new schemes are actively playing on the fear and unknown of the virus and the stimulus payments.


Coronavirus-related (COVID-19) scams should be reported to the National Center for Disaster Fraud (NCDF) Hotline at 1-866-720-5721 or submitted through the NCDF Web Complaint Form. The NCDF is a national coordinating agency within the Department of Justice’s Criminal Division dedicated to improving the detection, prevention, investigation and prosecution of criminal conduct related to natural and man-made disasters and other emergencies, such as the coronavirus (COVID-19). Hotline staff will obtain information regarding your complaint, which will then be reviewed by law enforcement officials.

Taxpayers can also report fraud or theft of their Economic Impact Payments to the Treasury Inspector General for Tax Administration (TIGTA). Reports can be made online at TIPS.TIGTA.GOV. TIGTA investigates external attempts to corruptly interfere with federal tax administration, including IRS-related coronavirus scams.


Also, taxpayers can always report phishing attempts to the IRS. Those who receive unsolicited emails or social media attempts to gather information that appear to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), should forward it to Taxpayers are encouraged not to engage potential scammers online or on the phone.


Learn more by going to the Report Phishing and Online Scams page on Official IRS information about the COVID-19 pandemic and economic impact payments can be found on the Coronavirus Tax Relief page on, which is updated frequently.




IRS rules target coaches at Duke, Notre Dame, hospital chiefs

By Samuel McQuillanLaura Davison


Heads up, Duke basketball’s Mike Krzyzewski and Notre Dame football’s Brian Kelly — the Internal Revenue Service has new rules that could take a hefty chunk of your multimillion dollar salaries.


The IRS issued guidance on Friday that implements a change in the 2017 tax overhaul, and levies a 21 percent excise tax on some nonprofit employees’ salaries above $1 million. The tax could also hit many highly compensated private college coaches as well as non-profit hospital executives, such as Kenneth Davis at Mount Sinai in New York or Yale New Haven Hospital’s Marna Borgstrom.


The 2017 Republican law included a tax on a nonprofit’s five highest-paid employees earning $1 million a year or more. It targets many elite college basketball and football coaches — such as Krzyzewski, who earns more than $7 million, or Kelly at $2 million — but also applies to all tax-exempt organizations under the Tax Code’s Section 501.


Yet there’s a big loophole: The law doesn’t apply to employees at many public colleges. That means Clemson University football coach Dabo Swinney is able to duck the tax on his more than $9 million salary, as is University of Kansas basketball’s Bill Self on his $4 million income. Those institutions can claim tax-exempt status as a government unit, and not as a tax code section 501 organization.


“I’ve never seen anything looking and telling us exactly what Republican lawmakers were trying to do,” said Phil Hackney, a law professor at the University of Pittsburgh. “It wouldn’t seem to make sense to apply it to say Stanford but not Alabama. It’s kind of crazy.”


The organization, not the employee, pays the tax to the IRS. They’ve been on the hook for this tax since 2018, but the new rules give nonprofits clarity about how to calculate their employee’s wages, bonuses and other compensation to determine if they’re required to pay the tax.


The guidance also addresses excise levies on so-called parachute payments, or generous severance pay, roughly equal to or exceeding three times the person’s base salary.


The IRS first put out preliminary guidance in December 2018, which confirmed that public colleges and universities aren’t subject to the tax if they don’t also have a 501 destination. It even advised that public schools with tax-exempt status could relinquish that as a way to avoid the tax.

Crimson Tide, Wolverines

Among the universities in that group are football powerhouses the University of Alabama and the University of Michigan. Their coaches, the Crimson Tide’s Nick Saban and the Wolverines’ Jim Harbaugh, are also among the highest paid in college sports.


The excise-tax provision aligns some of the tax rules for non-profits and public corporations. Public companies can’t deduct compensation greater than $1 million for certain employees and are now subject to a income tax rate of 21 percent.


Private universities also saw their endowments tapped as a way to pay for the 2017 tax overhaul. The law put a 1.4 percent excise tax on private schools with endowments of at least $500,000 per student. That hit some of the richest schools including Harvard, Yale and Stanford.


“The 2017 act was just bizarre in the context of [the] nonprofit world,” Hackney said. “It just created enormous new paperwork for lots of folks that never had to deal with this ever before.”




La Crosse, Wisconsin: Dentist Frederick G. Kriemelmeyer, 71, has been sentenced to six years in prison for tax evasion.


In 2007, Kriemelmeyer was ordered to pay $135,337 for unpaid federal income taxes. By 2012, the IRS had assessed Kriemelmeyer for more than $450,000 in taxes, interest and penalties.


From at least 2013 through 2015, Kriemelmeyer did not file returns reporting the income from his dental practice, directed his patients to pay him in cash or by check with blank payee lines and paid his business and personal expenses with third-party checks and cash.


Kriemelmeyer, who was recently convicted, was also ordered to serve three years of supervised release and to pay $226,839 in restitution to the U.S.




Tuttle, Oklahoma: Christa Dawn Jackson has been sentenced to four years in prison for embezzling more than $1.2 million from her employer through wire fraud and to two years in prison for signing a false federal income tax return.


Jackson, who pleaded guilty in October, worked as an office manager at AllPoints Pipe Service, where she had access to company checks and accounting systems. The United States alleged that from February 2010 to June 2017, she made company checks out to herself and her husband and forged the signature of the company’s owner on those checks. It also alleged she initiated electronic transfers from company bank accounts to third parties for her own benefit and created false invoices to conceal her embezzlement.


The government also charged her with signing a false 2014 federal income tax return on which she reported that her income was only $96,496 when she knew it was substantially higher.


Jackson was ordered to pay a total restitution of $1,477,872.10 to the IRS, to the victim company and to an insurance company. She was also sentenced to a total of four years of supervised release. She will serve the sentences concurrently.





3 reasons to save more for college

Long-range planning is hard during a pandemic, but you don't want to miss opportunities.



Key takeaways

  • The bumpy stock market might present opportunities when investing for a long time horizon.
  • Consider redirecting refunds from canceled programs toward college savings.
  • New tax rules give college savings plans increased flexibility.


Families around the world are even having trouble making weekend plans, so the idea of thinking long-range about saving for college is a hard ask right now.


Put more money into the market while it is bouncing around like a playground ball? Save for college tuition at institutions that are not even sure they are opening for regular classes in the fall?


"For those who have other top-line priorities under control—like saving for retirement and stashing away a robust emergency fund—there are opportunities to think strategically about the future," says Melissa Ridolfi, vice president of college and retirement leadership at Fidelity Investments.


For many parents and grandparents, that can mean making lump-sum contributions to a college savings plan, like a 529 savings account, or setting up automatic monthly contributions for long into the future.


529 college savings plans are flexible, tax-advantaged accounts designed specifically for education savings.

The tax advantages of a 529 plan are that earnings grow federal income tax-deferred and withdrawals used for qualified education expenses are free from federal income taxes and, in many cases, state taxes. In certain states, all or a portion of your contributions may be deducted for state income tax purposes as well.


So far, people seem to be heeding advice to save more for college. Fidelity has seen a rise in new accounts in the 529 college savings plans it manages, up 36% in the first quarter of 2020 over the same time period in 2019. Contributions are up 30% in the same time period.

If you are wondering what to do about college savings, here are 3 reasons to consider contributing now:


1. Market volatility can be your friend

The stock market has made headlines nearly every day since the start of 2020, and it could be a bumpy ride for those with kids very close to college. But if it's still a number of years before your child might attend college, it can make sense to take advantage of the lower market to invest.


With college planning, your time horizon matters, because you need that money for a specific goal with a known time frame. Many people who invest in 529 college savings plans put that money into age-based portfolios that shift the allocation of assets as your child ages and generally get less risky over time. You can consult your individual plan prospectus for the exact trajectory of the funds available to you.


If you have a newborn right now, for instance, you might start out with a fund that is mostly invested in stocks for growth potential and is pegged to a college start date of 2038. By the time your child nears the end of high school, the mix of investments in that fund would have reduced stock market exposure, with some even in ready cash to start withdrawing tuition payments.


Today's high school seniors are likely already in conservative investments and would generally have fared much better in the market volatility so far in 2020 than a 100% stock portfolio. Even a growth portfolio, because it would still be diversified with a mix of stocks and bonds, generally fared better over the first part of 2020 than an all-stock portfolio.

The bumpy market: How different asset mixes can impact performance

Chart shows the performance of different investment portfolios (100 percent stock, conservative, balanced, or growth) from January 2, 2000 through May 14, 2020

Source:The Dow Jones US Total Stock Market Index used for stocks; the Bloomberg Barclays US Aggregate Bond Index used for bonds; and the Ibbotson Associates SBBI US 30-day Treasury Bill is used for cash.
Note: 100% stock is 100% stock, 0% bond, 0% cash; Growth is 70% stock, 25% bond, 5% cash; Balanced is 50% stock, 40% bond, 10% cash; Conservative is 20% stock, 50% bond, 30% cash.


2. Repurpose cancellation fees

Tai-chi lessons on hold? Camp canceled? Parents can take money that was designated for their kids and pay it forward into their college funds. Families might also think about setting aside the $500 credit for each child under 17 included in the stimulus checks that many received from the CARES Act for Covid-19 relief.


"While the future of college might seem unclear now, the cost is likely to keep going up," says Ridolfi.


Education cost inflation was indeed up 2.2% for the 2019–2020 academic year. Average annual cost, including tuition, fees, room and board came to $21,950 for a 4-year, in-state public college, and $49,870 for a private 4-year for that year, according to The College Board.*


Fidelity's rule of thumb on saving for college is to multiply your child's current age by $2,000 and use that amount to determine whether your college savings to date are generally on track to cover 50% of the cost of attending a 4-year public college. To assess your needs more specifically, you can use Fidelity's college savings calculator, which can help you calculate what you might need by the time your child is ready to enroll.


You might also want to reassess your overall savings goal if you were planning on your child working over the summer and their job is canceled. That might mean you have to save more now, or over time, to compensate.

Families of current college students may have refunds from tuition or room and board to consider reinvesting. If you paid your spring semester bill with funds from a 529 account and have received a refund from the school, there are new tax rules in the CARES Act that require the funds to be returned to the 529 account by July 15, 2020. You may also have to consider this for fall tuition payments, depending on what happens with enrollment at your child's school.


3. Invest for flexibility

If you have more than one child, you might have a college savings account for each and think of those as defined buckets that can't be mixed. But 529s are actually very flexible when it comes to moving funds from one child to another.


If you end up with unused funds in your 529 and you want to use them for nonqualified expenses, you can always cash out the account, although it is subject to a 10% penalty and you will owe income tax on the growth portion of the account.


If you would like to take classes to advance your career, you can use the money you have saved for yourself for qualified courses. Since 2018, you can use the funds from a 529 plan for K–12 education. The SECURE Act, which went into effect at the start of 2020, expanded the definition of qualified distributions so that 529 funds can be used for certain apprenticeship costs and to repay up to $10,000 in student loans. You can even hold onto the 529 and designate the funds for grandchildren, way down the line.



Devos sued over seizure of student tax refunds amid pandemic


Education Secretary Betsy DeVos was accused in a lawsuit of illegally seizing millions of dollars in tax refunds from students who defaulted on federal loans despite a congressional ban on such collections during the pandemic.


The groups Student Defense and Democracy Forward filed the proposed class-action suit, which also named Treasury Secretary Steven Mnuchin, Friday in Washington, saying the collections are part of the the Trump administration’s “botched” roll-out of the $2 trillion coronavirus relief bill.


The legislation suspended wage garnishments and other involuntary collections on federal student loans until Sept. 30 “to help families weather the economic fallout of the coronavirus pandemic,” the groups said in a statement. The ban includes a Treasury program that garnishes tax refunds, they said.


One of the plaintiffs, Kori Cole, a graduate of Heritage College in Lakeside, Colorado, said she received a Treasury notice in April saying her and her husband’s entire $7,000 federal tax refund was seized. She currently owes $23,000 on loans she took out for an X-ray technician and medical assistant course, according to the complaint. Her husband’s woodworking business, their only source of income, was shuttered during the pandemic.


The lawsuit seeks a court order halting the practice and a return of the allegedly seized checks.




Cannabis case challenges non-deductibility of expenses

By Roger Russell


The Harborside case is not the first time that an entity specializing in the processing, sale or distribution of cannabis has challenged the constitutionality of Code Section 280E, but it is very likely the largest and the most closely watched case. And if the Ninth Circuit agrees with the appellant, it will ultimately be decided by the Supreme Court.


The Tax Court decision in Patients Mutual Assistance Collective Corporation d.b.a. Harborside Health Center v. Commissioner held that the medical marijuana dispensary could not deduct business expenses despite operating its business legally under California law. The Tax Court denied Harborside’s deductions from 2007 to 2012, citing Code Section 280E, which prevents any trade or business that “consists of trafficking in controlled substances from deducting any business expenses.” Harborside has appealed the decision to the Ninth Circuit.


“The effect on these businesses, which are already incredibly regulated, is a 60 to 70 percent effective tax rate,” said James Mann, tax partner at law firm Greenspoon Marder and former deputy assistant attorney general of the Tax Division of the Department of Justice in charge of federal appellate tax litigation. “What it does is drive a lot of business people into the unregulated market. If they want to sell and they can’t do it legally, they will do it in the unregulated market.”


Mann, lead counsel on the appeal, said that the challenge to Section 280E is based on the Sixteenth Amendment to the Constitution.


“It’s very straightforward,” he said. “The Sixteenth Amendment permits taxes only on income, and Section 280E results in the facility being taxed on something other than income, since the section disallows deductions for labor and rent. The calculation of the amount subject to tax is not income, because income means gain and they’re being taxed on something other than gain.”


“The people that ratified the amendment, and all the cases, say that ‘income means income,’” Mann said. “The government now is ignoring those cases.”


The second issue is a tax accounting issue, he indicated.


“Even if the deductions are disallowed under the code, a cannabis business should still get to reduce its gross income by the cost of goods sold,” Mann said. “Our argument is that Harborside should be able to calculate its cost of goods sold exactly the way Whole Foods does. Their costs that go into preparing the food and making it available for sale, including labor, all are part of their costs of goods sold, but the Tax Court limited Harborside essentially to the cost of the raw cannabis. There are all kinds of processing costs, including trimming, curing and testing, which the government would not allow Harborside to take into account. So this argument is that basic tax accounting principles should allow Harborside to be treated as any non-cannabis taxpayer.”

Harborside is by far the largest cannabis dispensary in the U.S., according to Mann. “It’s a great case for appeal because they are so well-managed — their books and records are in perfect order.”


Mann filed the appeal May 26, and expects the IRS response by July 26. “Arguments will be heard from mid-December to mid-January,” he said. “If the Ninth Circuit overturns the Tax Court, the Department of Justice will petition for cert [hearing of an appeal before the Supreme Court].”


“If the U.S. asks for cert, the Supreme Court will likely grant it,” Mann believes.




The focus shifts to PPP forgiveness

By Roger Russell


Although the Paycheck Protection Program under the CARES Act has been criticized on a number of sides, it was passed with lightning speed and made massive strides toward getting funding into the hands of those that needed it. The attention, for those that received aid, has now focused on the forgiveness aspect of the loans received, according to Tom West, a principal in the pass-throughs group of the Washington national tax practice of Big Four firm KPMG.


“At first, the issue was eligibility,” he said. “Now that we’re past that the question becomes what about forgiveness — how do you document expenses? Assuming you get some amount forgiven, what are the tax consequences?”


“Initially, there was a question as to whether or not the expenses that used proceeds of a forgiven PPP loan impacted the deductibility of the expenses,” observed West. “The IRS answered that in Notice 2020-32. It said that in fact those expenses are not deductible.”


West, a former tax legislative counsel and acting assistant secretary of Treasury for Tax Policy, believes the notice was wrong. “The ruling came as a surprise to many affected by the issue,” he said. “There are merits to both sides. From a policy standpoint, the IRS could have gone either way. They may have kicked up a hornets’ nest on this. If you think about a normal loan and you use its proceeds on business expenses, it would be deductible. If for whatever reason that loan is ultimately forgiven, it doesn’t change the deductibility of expenses but it creates cancellation of debt income.”


“Unfortunately, the conversation around this refers to it as a ‘double benefit’ if expenses paid with the forgiven loan proceeds are deductible,” he said. “I don’t see it as a double benefit, but as an intended benefit.”


“Many members of Congress, including Senate Finance Committee Chair Chuck Grassley, have stated that the IRS’s position in Notice 2020-32 is contrary to the legislative intent of the PPP,” indicated Norman Lencz, a tax partner at law firm Venable. “In addition, a number of professional organizations, such as the AICPA, have issued statements requesting that Notice 2020-32 be rescinded or overruled by legislative action. Furthermore, many practitioners have argued that the notice is inconsistent with the Internal Revenue Code and the CARES Act.” As a result, he predicted, “The position set forth in Notice 2020-32 may be reversed by legislative action, further IRS guidance, or a court ruling.”


The rules

In mid-May, the Small Business Administration released a loan forgiveness application, and detailed instructions, which include a number of measures aimed at easing compliance burdens and the process for borrowers:

  • Options for borrowers to compute the payroll costs using an “alternative payroll covered period” that fits in with borrowers’ regular payroll cycles;
  • Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after businesses get their PPP loan;
  • Step-by-step instructions on how to do the calculations required by the CARES Act to confirm eligibility for loan forgiveness;
  • “Borrower-friendly” implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30; and,
  • The addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined.


“Businesses whose loans have been funded must now focus on carefully tracking how they spend their PPP loan,” said Michael Greenwald, partner and business entity tax practice leader at Top 100 Firm Friedman LLP. “The second round of PPP was a little more efficient in reaching borrowers that were originally intended by the program. They limited the ability of larger banks to dominate the flow of funds by turning off the windows for them for a period of time each day, and they set aside money for smaller community bands and credit unions.”


Naturally, there are issues as to what is included in eligible costs, Greenwald said. “Eligibility for forgiveness of the PPP loan may be reduced if less than 75 percent of the funds are spent on payroll costs, fewer full-time-equivalent employees are employed than were employed during the base period, the salary or wages of an employee are less than 75 percent compared to the prior quarter, and the reduction in number of employees and/or compensation isn’t cured by June 30, 2020.”


Greenwald suggests keeping PPP loan proceeds in a separate bank account to more easily track how the funds are being used. He noted that the guidance so far doesn’t cover all situations. “What if an entity rents space from another entity that is a related party? Or when I took the loan I believed sincerely that I qualified due to economic uncertainty. How does one define economic uncertainty — is it just for the eight-week period or the entirety of my economic future? ... The SBA has threatened criminal penalties for misrepresentation and false certification, so documentation of the usage of these funds is crucial.”


“Secretary of Treasury Mnuchin has said they would review every loan to make sure that the people getting loans really had the need,” noted Dan Friederich, managing director at Top 100 Firm CBIZ MHM. “Who knows if they have the manpower to do that? There are a lot of open questions on forgiveness. For example, how do you account for expenses during the eight-week period — cash or accrual or some other method? How do you calculate the number of full-time employees for purposes of forgiveness? There’s no right or wrong answer, we just need certainty.”


Real-world issues

“There’s a lot of confusion waiting for guidance,” agreed Brian Newman, a partner and federal tax practice leader at Top 100 Firm CohnReznick. “One of the biggest issues in the restaurant/hospitality area is that they will not be able to staff up quickly enough. A restaurant that had 100 employees when it closed isn’t going to bring back all 100 back immediately — there will be limitations on how many can be seated at one time.”


“The other issue is that many of the staff won’t want to come back, either because they are afraid or because they’re making more money on unemployment,” he said. “That makes it hard to meet the criteria of spending 75 percent on payroll during the eight-week period.”


“I’m hopeful that Congress will take this into account and modify the requirements to coincide with what’s happening in the real world, where things come back online very slowly and businesses need this money to survive,” he said. “Many think that they might as well stay closed if they’re not going to be able to meet the criteria for forgiveness. They believe they will lose less money by staying closed than spending money on the required payroll, bringing back staff, and then not meeting the forgiveness requirements.”


Roger Harris, president of Padgett Business Services, agreed. “Unemployment is attractive, and it’s hard to get people to return to work if the business isn’t open. Many are asking to change the 75-25 percent rule [at least 75 percent, with the remaining 25 percent on rent or mortgage interest, plus utilities] to a 50-50 one, to make it easier for small businesses to qualify for forgiveness.”


At press time, Treasury Secretary Mnuchin had indicated that the government would consider how to change the program to help small businesses meet the qualifications for forgiveness.


The other issue concering Harris is the eight-week period within which to use the loan proceeds. “Borrowers should have the option to select any period that’s within six months of receipt of the loan proceeds,” he said.




10 takeaways on the PPP loan forgiveness application

By Steven Pinsky


On May 15, 2020, the SBA published the Paycheck Protection Program Loan Forgiveness Application (SBA Form 3508). While the application clears up several of the outstanding questions that borrowers may have with regards to forgiveness eligibility, there are still some questions left unaddressed.


As a crisis management professional, I have been immersed in all things related to the PPP for several months, and so I would like to share my top 10 takeaways from the application. This list is not intended to be all-encompassing, but focuses on those issues that have provided some of the bigger questions over the past weeks.

Please note that there are still several moving parts and many of the calculations involve some decisions that need to be made in key areas. Businesses will need to work with their financial, accounting or consulting specialists to make sure they are able to maximize forgiveness.


1. Alternative payroll covered period

For borrowers with payroll schedules that are biweekly or more frequent, the application allows them to choose an eight-week (56-day) period that begins on the first day of the first pay period that begins after disbursement of PPP funds (the “alternative payroll covered period”).

But if a borrower chooses an alternative payroll covered period, they must apply this pay period to wherever there is a reference to “the covered period or the alternative payroll covered period” but must use the covered period where only the covered period is referenced.


2. Payroll costs (paid versus incurred)

The application states that “borrowers are generally eligible for the payroll costs paid and payroll costs incurred ”during the appropriate period. Based on this language, it appears that the SBA will be allowing both payroll paid in the appropriate period for work performed just prior to the covered period and for payroll accrued within the eight weeks, even if paid after the covered period, provided that proof of payment is submitted.

This means that borrowers may be forgiven for more than the eight weeks of payroll originally anticipated, although individuals will still be capped at $15,385 based on an annualized $100,000.


3. Non-payroll costs (paid versus incurred)

The allowable non-payroll costs do not seem as clear at the payroll costs, but it can be read in a similar manner. The application states, “An eligible non-payroll cost must be paid during the covered period or incurred during the covered period and paid on or before the next regular billing cycle.”


4. Personal property included

There were many questions surrounding the initial meaning of “rent” with regards to approved uses of PPP funds. The application clears up that ambiguity. The application includes “lease agreements for real or personal property in force before Feb. 15, 2020.” This opens the door to include leases for personal property such as vehicles and office machinery.

It should be noted that covered utility payments include “transportation.” Given that vehicle leases are included, and the SBA has defined utilities to include fuel costs in guidance provided to self-employed individuals, fuel cost may be ultimately allowed as a utility cost.


5. FTE defined

Many of the questions we received from borrowers revolved around the definition of a full-time equivalent. The application uses a 40-hour work week as the standard for an FTE and rounds to the nearest tenth. It also allows for a “simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.” Borrowers should calculate using both methods to see which is more advantageous.

6. Baseline FTE

There was an anticipation that the baseline FTE calculation would involve calculating the FTE for each pay period in the chosen baseline period and taking the average of all of the pay periods. The methodology outlined in the application appears to be easier. Here is the methodology for calculating the baseline FTE for forgiveness reduction purposes.

First, for each hourly employee, add up the number of hours worked in one of the chosen baseline time periods. Salaried full-time employees are one FTE. Borrowers can choose from the following options:

  • Baseline 1: Feb. 15, 2019, through June 30, 2019
  • Baseline 2: Jan. 1, 2020, through Feb. 29, 2020
  • Baseline 3: For seasonal employers, any consecutive 12-week period between May 1, 2019, and Sept. 15, 2019.

Then, divide each employee’s hours by the following:

  • Baseline 1: 768 hours (19 weeks + 1 day x 40 hours per week)
  • Baseline 2: 344 hours (8 weeks + 3 days x 40 hours per week)
  • Baseline 3: 480 hours (12 weeks x 40 hours per week)

Finally, average the calculated FTE across all employees. The maximum FTE per employee is 1.0. The simplified method described above can also be used.


7. Potential number of FTE calculations

An interesting aspect of the application is the number of FTE calculations that may be required including the following:

  • FTE for employees during the covered period making less than $100,000 during 2019
  • FTE for employees during the covered period making more than $100,000 during 2019
  • FTE for baseline FTE (one of three possible time periods)
  • FTE at time of loan application
  • FTE at time of forgiveness application
  • FTE from Feb. 15, 2020, through April 26, 2020
  • FTE at Feb. 15, 2020
  • FTE at June 30, 2020


8. FTE safe harbor

There is a forgiveness reduction should the average number of FTEs in the covered period (or alternate) fall below the baseline average FTE. A borrower need not calculate the reduction if both the following safe harbor conditions are met:

  • FTE for the period between Feb. 15, 2020, and April 26, 2020, is less than the total FTE in the borrower’s pay period that includes Feb. 15, 2020; and,
  • The borrower’s FTE as of June 30, 2020, is greater than or equal the total FTE in the borrower’s pay period inclusive of Feb. 15, 2020.


9. Payroll reduction clarification

The baseline comparison period for evaluating whether there is more than a 25 percent reduction for each employee is Jan. 1, 2020, and March 31, 2020. Given that the baseline salary is 13 weeks and the covered period is eight weeks, the salaries need to be normalized. The application has provided some clarity on this issue. For hourly employees, it appears that the comparison is based on an hourly rate comparison. For salaried, the comparison is based on the annualized salary for each of the period as prorated for the covered period.


10. Still some questions ...

While the application did clear up many of the outstanding questions that we have seen, there are still a few open issues that require clarification. Here are some of them:

  • What if the covered period per the application extends past June 30, 2020?
  • Economic Injury Disaster Loan overlap: The amount of PPP forgiveness will be reduced by any EIDL advances received. But what if you received an EIDL? Can you pay down if you received the EIDL after application for the PPP? How does the EIDL paydown affect the 75 percent payroll requirement, especially when the loan proceeds included repayment of an EIDL?




1040-X e-filing starts this summer

By Jeff Stimpson


This summer for the first time, taxpayers will be able to electronically file their Form 1040-X, “Amended U.S. Individual Income Tax Return.”


Making the 1040-X an electronically filed form has been a goal of the IRS for a number of years, the agency said, adding that it’s also been an ongoing request from the tax professional community and a continuing recommendation from the Internal Revenue Service Advisory Council and the Electronic Tax Administration Advisory Committee.


About 3 million Forms 1040-X are filed each year. Currently, taxpayers must mail a completed 1040-X to the IRS for processing.


“This new process is a major milestone for the IRS,” said IRS Commissioner Chuck Rettig (pictured), adding that 90 percent of taxpayers use e-filing. “But the big hurdle that’s been remaining for years is to convert amended returns into this electronic process,” he said.

Taxpayers can still use the “Where’s My Amended Return?” online tool to check the status of their e-filed 1040-X.


Only tax year 2019 Forms 1040 and 1040-SR returns will be able to be amended electronically. In general, taxpayers will still have the option to submit a paper version of the Form 1040-X.




Looking ahead: Tax planning and the coronavirus

By Roger Russell


The coronavirus has affected virtually everyone in the nation. Its impact will be felt for years, with far-reaching effects on how practitioners work, the financial status of their clients, and the tax planning issues resulting from new legislation.


With that in mind, we asked experts to weigh in on how practitioners will be affected and what they need to know to adapt to the new environment created by the pandemic.


Tough times ahead

There will be an unprecedented number of bankruptcies and offers in compromise, accompanied by loss of homes and home sales, according to Robbin Caruso, partner and co-chair of the national tax practice at Top 100 Firm Prager Metis. “People with current and future tax and debt problems may be forced to sell their home, depending on the bankruptcy exemptions and specific rules in their state,” she said. She noted that the last three years of federal tax assessments are not forgivable in bankruptcy.


A silver lining?

Paradoxically, this may actually be a great time to consider submitting an offer in compromise for those who qualify and have IRS tax liabilities, given the unknown current economic circumstances.

“OIC approval is based on current status, and at this time there is no guarantee that a taxpayer will get their job back or that their business will recover, which increases chances of a successful offer. All federal tax liabilities may be included in an OIC, and a principal residence will not generally be forfeited,” said Caruso.


Hungry states

Accompanying individual losses will be losses to states in reduced tax revenue from income and sales taxes.

“Many states will raise their taxes dramatically to make up for shortfalls in revenue,” predicted Bill Nemeth, president of the Georgia Association of Enrolled Agents.


Built-in obsolescence

Tax planning will be affected by the numerous legislative and rule changes in response to the virus. End-of-year planning will be complicated by the fact that most of the coronavirus-related provisions are for one year, with practitioners faced with learning about issues for provisions that are temporary.

For example, the change to Code Section 163(j) provides an increase in the business expense limitation from 30 percent to 50 percent, and allows taxpayers to apply the increased limitation to any tax year beginning in 2019 or 2020.


Retirement help

The CARES Act gives participants in certain retirement plans the opportunity to take penalty-free early distributions, up to $100,000, in 2020. The tax due on the distribution can be spread out over the next three years.

“One of the decisions practitioners need to guide clients on is whether to take advantage of the three-year spread, or pick it up this year, since it’s been a bad year anyway,” said Ed Zollars, partner at Thomas, Zollars & Lynch Ltd. and instructor and author at Kaplan Financial Education.


Deferring deposits

New legislation allows employers to defer the deposit and payment of the employer’s share of Social Security taxes and self-employed individuals to defer payment of certain self-employment taxes. Employers that received a Paycheck Protection Program loan are not eligible. “This will make computation of self-employment tax very different,” said Barbara Weltman, author of “Small Business Taxes 2020.”


Handling NOLs

“The elephant in the room will be NOL carrybacks,” Weltman noted.


Under the CARES Act, net operating losses from 2018, 2019 or 2020 may be carried back to each of the five tax years preceding the tax year of the loss. “Many firms are expecting large losses for 2020,” she said.


The PPP in the long term

The Paycheck Protection Program has been a help to many of those who received funds, but will complicate matters for the 2021 filing season. Qualifying for PPP loan forgiveness and calculating what amount of expenses will be disallowed will make it a difficult filing season, according to Michael Knight, partner at Knight Rolleri Sheppard CPAs.

“Moreover, the IRS position of not allowing deductions for business expenses funded by forgiven PPP loans will place practitioners in a dilemma if the position is eventually changed,” he said. “But pressure is building for modification of the eight-week rule and the 75-25 rule for loan forgiveness.”


The ramifications of remote work

Both individuals and firms will be affected by the massive shift to employees working from home. Firms may opt to downsize their office space requirements and continue to work in a semi-virtual environment, even when the crisis is over, suggested Roger Harris, president of Padgett Business Services. “Many individuals will need training in the tax law changes, but that can be done remotely.”

And there will be a temptation for some taxpayers in high-tax states to change their residence to a low-tax state while continuing to work remotely.




Preparing for emergencies

Learn how to build a safety net to help protect yourself and your loved ones.



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.
  • Try to save in an account that pays some interest but preserves liquidity.
  • Consider sources of credit, ideally with low interest rates, available as a backup.
  • Be sure to have adequate health and disability insurance coverage.


One lesson we’ve all learned from 2020 is that life can change very quickly. Things people take for granted, like unlimited access to grocery stores, may not always be there. You may need to buy food and staples for a month at a time—and not only for yourself, but for family or friends who may now be living with you. The point is, emergencies can come in many unexpected forms.


Because life and plans change, often unexpectedly, Fidelity suggests establishing an emergency fund that would cover at least 3 to 6 months' of essential expenses. Saving that money in liquid accounts (i.e., the cash is readily available), and adding in available sources of credit and insurance, can help you sleep better at night during the current COVID-19 pandemic, as well as future emergencies, big or small.


Here are answers to 5 common questions that can help you protect yourself and your loved ones.


1. How much cash should I save for emergencies?

Fidelity suggests setting aside at least 3 to 6 months' worth of living expenses to protect yourself from the financial fallout of a potential job loss or the loss of other income. If you're single but have family backup, you might be comfortable with 3 months of savings. However, if you have a spouse, kids to support, and a mortgage, or worry about replacing a lost job or other income quickly, you might feel better with 6 months or even more.


If you do end up unemployed, there may be resources available to help ease the impact. 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.

Benefits vary by state. For example, some states provide addit

ional benefits if you have children or other dependents. So check your state's unemployment site for details.

Due to the COVID-19 crisis, unemployment benefits have been enhanced under the CARES Act. The Act allowed states to extend unemployment benefits to independent contractors and other workers who would not qualify under normal circumstances for up to 39 weeks, through the week ending December 26, 2020. The new law also provides an additional $600 per week through July 25, 2020, to people collecting unemployment benefits.


Check your state's unemployment insurance officeOpens in a new window to find out how to file for benefits and the documentation required under the CARES Act.


Requirements to qualify for unemployment benefits under normal circumstances include:

  • You must be physically able to work—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.


Remember too, that in order to file for unemployment benefits, the state's benefits system needs to be functioning well. In a worst case scenario, there may be delays in filing and receiving unemployment benefits.

Read Viewpoints on COVID-19 layoffs: What to do now


2. What about borrowing?

In some cases, borrowing to pay for an emergency may be necessary if you don't have financial reserves to cover it. For instance, a home equity loan or line of credit could be an option, as well as credit cards. Note that it's extremely important to consider the potential consequences of borrowing against your home. There may be financial, legal, tax, and estate implications. If you default on the loan, you could even lose your home.

If you've lost income, borrowing money can be risky. Debt can quickly snowball if you're not able to pay it off at the end of the month.


3 caveats:

  1. 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. Credit may not be as available in a global economic downturn. Lenders may reel in lines of credit in difficult economic times so it may not always be a failsafe.
  3. If you need to borrow, make sure to keep interest rates as low as possible.


3. How can I save more?

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.


Trim spending. As we shelter in place, some expenses may have temporarily gone away, like commuting costs, clothing, travel, entertainment, and eating out. Directing some of those savings to an emergency fund could help bolster your emergency fund quickly.


Read Viewpoints on 7 cash flow tips for tough times


4. Where should I keep my emergency fund?

Generally, keeping your emergency fund accessible and liquid can be a good idea—in addition to avoiding risky investments that could lose money. To avoid dipping into your emergency savings, it can also 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 the average yield may only be 0.10%.1


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 though they may be SIPC-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. Short-term 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—if you've divided your emergency savings between highly liquid accounts and those that are less easy to access. An example of a very liquid account would be a savings account—your savings are easily accessed at no cost on the same day. Cash held in a money market fund may not be available on demand—you would likely need to sell the fund and wait until the next business day.


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, though there are provisions under the CARES Act that waive penalties under special circumstances—but not taxes.


Read Viewpoints on Thinking of taking money out of a 401(k)?


5. Can insurance help protect me?

Besides having cash that you can access in an emergency, insurance is another way to be prepared for one. In circumstances where insurance would provide coverage, the more insurance coverage you have, the less will need to come out of your emergency fund.


Think about life insurance to protect your family. 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, you may also lose your employer-provided health insurance. Even if you are eligible for continuation of coverage through COBRA, your premiums are likely to significantly increase—annual premiums can be up to 4 times more expensive through COBRA than the employee cost of the same coverage while employed.2 Factor in some additional money to cover the cost of health care, just in case.


The bottom line


Everyone needs an emergency fund—no matter how old you are or what your income level is. The current pandemic is just the latest reminder. But there are myriad other circumstances that could require having cash on hand—losing a job, natural disasters, a leaky roof, unexpected child care expenses, a surprise medical bill that insurance won't cover, or family members returning home or needing help.


Planning ahead is key. If you're diligent about saving for emergencies in liquid accounts and bolster your savings with insurance and available credit, you'll be more prepared for what life throws at you. And that knowledge can bring peace of mind.




IRS increases HSA limits for 2021

By Michael Cohn

The Internal Revenue Service issued its annual inflation adjustment Wednesday for health savings accounts for 2021, at a time when many taxpayers are worried about their health in the midst of the novel coronavirus pandemic.


In Revenue Procedure 2020-32, the IRS said for calendar year 2021, the annual limitation on deductions for an individual with self-only coverage under a high deductible health plan is $3,600. That’s up from $3,550 this year (see our story).


For 2021, the annual limitation on deductions for an individual with family coverage under a high deductible health plan is $7,200, up from $7,100 in 2020.


For 2021, a “high deductible health plan” is defined as a health plan with an annual deductible that is not less than $1,400 for self-only coverage or $2,800 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $7,000 for self-only coverage or $14,000 for family coverage (this year, it can’t exceed $6,900 for self-only coverage or $13,800 for family coverage).


In March, in response to the coronavirus crisis, the IRS said high-deductible health plans can now cover the costs of COVID-19 testing and treatment before the plan deductible is met (see our story).


As part of the CARES Act that was signed into law at the end of March, Congress is also now allowing people to use an HSA or a flexible spending account to pay for over-the-counter drugs and medicine, such as allergy medications and pain relievers, without a doctor’s prescription. That reverses a provision of the Affordable Care Act that required a prescription for such purchases. The CARES Act also allows the use of HSAs for telehealth and other remote care services until Dec. 31, 2021.




When will you claim Social Security?

Financial planning can help you decide when to claim Social Security benefits.



Key takeaways

  • Social Security is an important part of retirement income for many people, but it can be hard to know when to claim your benefits.
  • Monthly benefits change based on the age when you claim. If you claim early, your benefits are reduced. If you delay you can get a higher monthly benefit.
  • The financial planning process can help you clarify the potential impact of different claiming strategies.


For most of your working life, the idea of taking Social Security may seem so far off that it’s not very realistic. But as you approach your 60s, your options begin to come into focus. If you qualify, you can start taking payments as early as age 62 or you can delay until as late as 70. The longer you wait the higher your monthly payment will be.


For each year you claim before your full retirement age (FRA), your benefit will be reduced. If you start taking Social Security at age 62, rather than waiting until your FRA, you can expect up to a 30% reduction in monthly benefits. FRA now ranges from 66 to 67, depending on your date of birth.* Waiting to claim your Social Security benefit will result in a higher benefit. For every year you delay past your FRA, you get an 8% increase in your benefit.


Social Security payments are a lifetime benefit and the current rules say those payments will go up with inflation, so your decision can have a long-term impact on your financial situation. But delaying means you may need to work longer or fund the early part of your retirement from other sources. When to claim Social Security is one of the first big decisions many people make about retirement. How can you decide?


Working with a financial professional can help to illustrate the tradeoffs involved with different claiming strategies and how your choice might impact your retirement over the long term. (Fidelity also offers a toolOpens in a new window so you could do this kind of "what if" testing on your own).


To see how the financial planning process might illustrate the tradeoffs, let's look at a hypothetical couple. Of course, this is just one example and Social Security isn't just about the age you claim. Being single, married, or divorced can play into your decision as well as other factors. You can find more details in our guide: How to get the most from Social Security.


The tradeoffs

Arnold and Larissa live in New York and work with a Fidelity professional named Elliot. They recently turned 60 and they decided it was time to come up with a plan for Social Security. The couple is debating when to take Social Security—they could claim when they plan to retire at age 63. But they know that their monthly benefit would increase if they delay, so they'd like to see what waiting until age 70 might mean for their finances overall.


The goals

First, Elliot meets with Arnold and Larissa to discuss their goals. The couple wants a retirement plan that will enable them to maintain their current active lifestyle and they want to retire on the earlier side, so they can travel and enjoy time with their adult children and new grandchildren. They hope to be able to leave a legacy that will help provide for their family after they are gone. Arnold's family has a history of some health conditions, so he wants to take advantage of his time but also be very confident that their retirement plan will provide a long retirement for Larissa.


Elliot encourages the couple to set a goal of planning for Arnold to live until 93 and Larissa until age 96, so despite their health concerns about Arnold's family health history, they will both be prepared for the possibility of a long retirement.


The checkup

Arnold and Larissa have had long careers and slowly but surely built up their savings, Larissa has saved more than $500,000 in her workplace savings plan and Arnold has about $360,000 in his, and their joint savings is another $130,000. In addition, the couple has a home worth about $500,000, though they still carry a $200,000 mortgage.


The options

To compare the impact of when they claim their benefits, Elliott uses an investment tool that runs 1,000 different hypothetical scenarios using their projected expenses and a range of different simulated market scenarios. Since it's impossible to predict the actual return of the markets, the goal is to look at lots of different possible outcomes and create a plan that will work even in challenging market conditions.


First, Elliot shows them the illustrations if they claim their benefits when they retire at age 63. The illustrations suggest the couple would have a moderate chance of maintaining their lifestyle until age 96, meaning the plan succeeded in about 80% of the scenarios. In an average market, meaning the middle outcome of the 1,000 projections, they could potentially leave a legacy of about $2.3 million. (See Median results in the chart.) Of course, sometimes markets are below average. In about 20% of the scenarios, the couple would need to cut spending or make other lifestyle changes to avoid running out of money in their portfolio. And in a very challenging market (defined as the worst 2.5% of scenarios), the couple could have spent all their savings and be $680,000 short of their estimated expenses. (See Downside results in the chart.)

The data in the chart is described in the text.


If they retire at 63 but wait to claim benefits until age 70, the couple's monthly benefit will be higher, but they will need to fund the first 7 years of their retirement from their savings. Still, the illustrations suggest that a higher guaranteed monthly payment starting at age 70 increased the chances of their plan succeeding—the projected value of their portfolio assets might let the couple maintain their current lifestyle throughout their retirement in more than 90% of the hypothetical scenarios. Even in a very challenging market, defined as the worst 2.5% of scenarios, the illustrations suggest that delaying benefits improved their position, reducing the difference between their estimated expenses and the projected values of their portfolio assets to roughly $240,000.


In this particular hypothetical scenario with challenging markets, having a higher monthly benefit made a significant difference.


Scenario 2: Retire at 63 and claim Social Security at 70

The data in the chart is described in the text.


Decision time

Arnold and Larissa review the numbers and consider the tradeoffs. Elliott discusses some other options, like additional claiming strategies, downsizing their home, working a few additional years, or relocating. But Arnold and Larissa really want to stop working while they are young enough to enjoy their retirement—and really want to have confidence in their plan. They decide to delay claiming until 70, but still retire at 63.


The power of planning

Deciding when to claim Social Security can be even more complicated for some couples who may want to consider spousal benefits or have other options. But working through a holistic planning process that takes into account your goals and overall financial picture can help you make an informed choice.




SEC charges three former KPMG partners for exam misconduct

By Sean McCabe


The Securities and Exchange Commission announced on Tuesday settled charges against three former KPMG audit partners for sharing answers to internal training exams, as well as wrongdoing during an investigation of exam-sharing misconduct at the Big Four firm.


According to the SEC, former KPMG audit partners Timothy Daly, Michael Bellach and John Donovan each partook in misconduct with exams KPMG administered to test audit professionals' ability to understand certain accounting and auditing principles.


The orders against Daly and Bellach concluded that in October 2018, at Daly’s request, Bellach texted Daly images of the answers to a training exam. After KPMG began investigating, Daly deleted the text messages from Bellach and falsely informed KPMG investigators that he had not received any answers to the KPMG training exams. The orders further found that Daly encouraged Bellach to delete the text messages, which Bellach did after receiving KPMG’s document preservation notice.


The order against Donovan finds that he too shared exams and answers within his team. According to the order, Donovan received answers to training exams between April and September 2018 from subordinates multiple times, and shared answers with his team three times. Donovan also falsely told KPMG investigators that he had not sent, received or shared these answers.


“Audit professionals play a critical role in the integrity of the financial reporting process and the protection of investors,” said Steven Peikin, co-director of the SEC's Division of Enforcement, in a statement. “These actions reflect our commitment to hold these gatekeepers responsible for breaches of their professional obligations.”


The SEC previously charged KPMG with violations concerning the exam sharing misconduct, as well as for altering past audit work after receiving stolen information on inspections conducted by the PCAOB.


"The actions against individuals who were separated from our firm more than a year ago was an expected development following the firm’s settlement with the SEC last June," said a KPMG spokesperson in a statement. "We are a stronger firm as a result of the actions we are taking to strengthen our culture, governance and compliance program. We are committed to delivering the highest quality professional services and fulfilling our important role in the capital markets."


The SEC’s orders found that the former KPMG audit partners’ conduct violated a PCAOB rule requiring them to maintain integrity in the performance of a professional service. Not admitting or denying the findings, Daly, Bellach and Donovan agreed to a suspension from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies, with the right to apply for reinstatement after three years, two years and one year, respectively.




With sales tax revenues down sharply, nexus becomes tool of choice for states

By Robert Schulte


The unprecedented, global, government-enforced economic shutdown is draining the lifeblood of cities and states: sales on sales tax revenue. Sales tax shortfall estimates vary from state to state, but are upwards of $150 billion for fiscal year budgets.


The U.S. economy had been booming until recently, with 2019 GDP hitting $21.4 trillion. The unemployment rate was near a 50-year low in February, and the stock market was hitting record highs. The U.S. consumer was consuming.


The federal government estimated that GDP shrank at an annual rate of 4.8 percent for the first quarter. Analysts are predicting the GDP will shrink by 40 percent in the current April-June quarter. This drastic drop in consumer spending presents a significant problem for state and local government budgets because general sales taxes comprise nearly 33 percent of general tax revenues.


How will states, who rely heavily on sales tax revenue, make up the shortfall? Many e-commerce and remote retailers are experiencing significantly higher demand for their goods and services because of the social distancing order. While growing fast, it still only represents 11 percent of total retail sales, according to the U.S. Commerce Department. Consumers spent $599.5 billion online in 2019, up 14.4 percent from $523.64 billion in 2018. State governments are eyeing this as a source of revenue.


The most heavily impacted sectors employ 37 million Americans — retail, restaurants, bars, transportation, entertainment (sports, arts and theaters), accommodations and services. These are the exact same industries that supply the bulk of sales tax revenues in the U.S.


Recent estimates project state sales tax revenues dropped by $3 billion in March and will drop by 25 percent in the second quarter. States and cities are desperate. The goods and services that are actually seeing increased demand, such as groceries and digital entertainment, are generally not subject to sales tax.


Seven states in the U.S. don’t impose a state income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) and will therefore see an even larger revenue gap. Two other states (New Hampshire and Tennessee) don’t tax earned income, but do tax investment income.


Florida is particularly vulnerable to a reduction in tourism during its peak season and lost $770 million in March . Texas saw a 9.3 percent drop in sales tax revenue in March. Texas is further exposed to the oil industry and the drastic drop in gas demand. Nevada relies on sales tax revenue more than any other state, with general sales taxes representing 55 percent of the state and local own-source general revenue. Nevada has been hit especially hard due to the closure of its vital casino and tourism trade.


Amid stay-at-home mandates, both consumers and brands are shifting their focus to e-commerce. Online transactions through businesses like Amazon, Walmart, Target, eBay, Etsy and other “marketplace” facilitators are still a nascent revenue source of state revenue due to recent legislative changes but are coming into focus as a key tool for the states to make up for lost revenue


Governments are armed with fresh law. South Dakota v. Wayfair, the landmark Supreme Court decision issued on June 21, 2018, ruled that “economic nexus,” with some limitations, is sufficient for a state to enforce its tax regulations on out-of-state, or remote, sellers. The threshold model implemented in South Dakota included a minimum of $100,000 in gross sales or 200 transactions before “economic nexus” was triggered, thereby requiring the business to collect and remit sales tax.


States are implementing Wayfair in various ways. In 43 states, legislation implements the “economic nexus” rules, with some variations. Forty states consider gross sales as the test, while four states consider taxable sales as the pertinent criteria. Thirty-seven states have enacted the $100,000 test on sales, with 26 states implementing both the $100,000 sales or 200 transactions test, and 11 states implementing just the $100,000 sales test.


Realistically, states are poised to aggressively enforce economic nexus laws given the reduction in physical retail. Many audit departments, with the majority of in-state retail businesses shuttered, will shift from auditing local retailers to auditing out-of-state retailers who engage in their state.


The CPA community is stepping up to help retailers avoid potential professional liability. Many retailers are battling to stay alive while others are thriving with an established online presence. Traditional brick-and-mortar companies will be looking to rapidly expand via e-commerce if they want to survive, ensuring they understand economic nexus is critical to their success


State and local audit departments may not engage in aggressive enforcement activities while the COVID-19 pandemic is still occurring. More likely, audit departments will spend the next six months evaluating the best approach to expand their enforcement activities towards remote sellers. Given record losses in sales tax revenue, governments have no choice but to look to the remote sellers for revenue.




Heat-seeking cameras and other tech stories you may have missed

By Gene Marks


Ten mostly-pandemic-related technology developments from the past month, and how they’ll impact your clients and your firm.


1. Microsoft 365 bundles Office 365 with AI and cloud-powered features

Microsoft announced last month that Office 365 will be making some changes toward the end of the month to Microsoft 365. The newest version of the suite will include Office 365 features while adding on robust templates and content, cloud-powered elements, and newer AI. Office 365 will now be known as Microsoft 365 Personal, while Office 365 Home will go by Microsoft 365 Family. (Source: Venture Beat)

Why this is important for your firm and clients: The subscription costs won’t change — with Microsoft 365 Personal costing $7 a month and Microsoft 365 Family $10 a month. The plans laid out for Microsoft 365 will contain all of the newest features, as well as the older favorites such as 60 Skype minutes, technical support, security features, and 1TB of OneDrive cloud storage for each user. This may be all that you need for your home workers to use if you don’t have other licenses available.


2. Google told workers they can’t use Zoom on laptops anymore

Google announced that they are banning Zoom — the well-known videoconferencing software — and will no longer allow their employees to use the software on their devices. While Zoom is a top competitor to Google’s videoconferencing app, Meet, the company said they are banning the software due to the many security breaches Zoom has faced over the past several weeks. As of mid-April the company announced that Zoom will no longer work on Google employee laptops. (Source: Buzz Feed)

Why this is important for your firm and clients: Of course the first question you have to ask, why were Google employees allowed to use a competitive product to begin with? Oh, that’s right … because it’s better! Putting that aside, Google’s ban has highlighted the significant security issues affecting Zoom users. We’re all using Zoom, so aren’t you also concerned? Clearly, the collaboration app’s management is concerned and the company’s CEO admitted mistakes. If your company is using Zoom you should be keeping up with its security updates and possibly evaluating alternatives.


3. Working from home? Turn your old laptop into a Chromebook

With more and more people working from home due to COVID-19, some are finding that their laptops may not be equipped to handle the amount of work they need to get done in their home office. Employees who have the ability to complete all of their tasks within a browser could potentially capitalize on being able to transform their older macOS or Windows machine into a more efficient Chromebook. Neverware — a company that helps schools and businesses refurbish their aging devices — can transform nearly any laptop into a Chromebook through their CloudReady branch and is now offering a free version of the software to individual users. (Source: Android Police)

Why this is important for your firm and clients: Have a lot of employees working from home that need devices? Don’t have the budget to go out and buy a new laptop? Or do you just want to have better control over the devices your work-from-home people are using when they access your network? A Chromebook checks those boxes and this method of conversion may be a big help to your precious cash flow.


4. Microsoft is rolling out a money management app

Microsoft announced that they are going to be releasing an app to help manage money, called Money in Excel. The new feature will be a part of Microsoft 365 and is going to mirror many of the features and qualities available in the tech giant’s Excel spreadsheets both in appearance and the way it works. Users will be able to sync their credit card and bank accounts to the new app in order to automatically keep track of purchases, deposits, and each accounts’ balance. Money in Excel will be able to help users identify trends and patterns in their spending along with several key components to keep users up-to-date on their accounts. (Source: Motley Fool)

Why this is important for your firm and clients: One of the more popular benefits that I’ve seen businesses — usually larger businesses — offer their employees is help with their personal finances. Some actually hire accountants and financial planners as consultants. Others have signed on to money management apps. Microsoft’s new app, which is part of their Office suite, gives small-business owners a chance to do the same. The better your employees manage their money in these uncertain times, the more stable they’ll be at work.


5. The bartering economy has exploded on Nextdoor

Due to the coronavirus outbreak, people are avoiding stores more and more and turning instead to Nextdoor to trade items or supplies of theirs for items they need. Nextdoor is an app that allows users from the same community or neighborhood to interact and share information. While trading through the popular app is not a new concept, the app has seen a rise in these types of exchanges. Hand sanitizer being traded for sugar, potatoes for toilet paper, or activities for children in exchange for vegetables are only some of the ways that people are getting creative in how to manage without going out to stores in order to avoid exposing themselves to the virus. (Source: One Zero)

Why this is important for your firm and clients: Nextdoor has been growing significantly over the past year, and with the coronavirus pandemic it’s become an even more popular way for communities — including business owners — to share information, news … and products. Given the number of people that are using the platform during these shelter-in-place days, it could be a great way to build relationships for when you re-open your doors.


6. YouTube launched a video-building tool

YouTube rolled out their free video-building feature called Video Builder in order to assist in businesses staying in touch with their customers throughout the shutdown due to COVID-19. While the current release is YouTube’s beta version, the company shared that they decided to release the tool sooner than originally planned in order to ease the burden on businesses that are currently struggling with limited resources and may not have access to outside video equipment. With Video Builder, business owners can produce either 15-second videos or six-second videos, as well as pick from various layouts, colors, and fonts to use for their videos. (Source: CNET)

Why this is important for your firm and clients: My business, like many small businesses, produces lots of YouTube videos to help our clients better use the products we sell. But we’re not video producers and we’re not experts with this technology. So tools like Video Builder help … a lot. Many it can help you as much.


7. SBA may have exposed data of 8,000 SMBs seeking relief loans

According to a statement given by the Small Business Administration, almost 8,000 small businesses who applied for small-business loans provided by the Emergency Injury Disaster Loan program may have had their information exposed due to a massive data breach. The SBA shared that they disabled the section of their website that was compromised and relaunched the portal with the application. Personal information that is thought to have been compromised may be made up of email addresses, citizenship status, insurance information, birth dates, phone numbers, addresses, and Social Security numbers. (Source: Pymnts)

Why this is important for your firm and clients: Unfortunately, the SBA has been so inundated processing and approving loan applications submitted in the wake of the CARES Act stimulus program that just trying to find out if you’ve been affected will likely be a frustrating experience. I think it’s a safe bet, however, that if you were one of the earliest filers for Economic Injury Disaster Loans your data has probably been exposed. The impact of all of this is unknown, unfortunately.


8. WhatsApp is trialing video calls with up to 8 people

WhatsApp is working on a feature to allow eight individuals to participate in video or group voice calls. In order for this new feature to work, everybody participating in the call will be required to install the most up-to-date version of the iOS or Android beta updates on their device. This new attribute will allow users to start calls using two options, either dialing through an existing group with the option to add additional contacts, or by going into the calls section and selecting “new group call” and choosing the individuals you want on the group call. This feature is currently in beta with potential for a broader rollout. (Source: Engadget)

Why this is important for your firm and clients: Videoconferencing is expanding to many platforms, so maybe if you’re not so comfortable with Zoom, you can consider other options. As popular as WhatsApp is in the U.S., the service is even more popular overseas, and if your business has customers around the world that are comfortable using the app, the new videoconferencing capabilities could be a very useful communication tool for you.


9. Amazon is deploying thermal cameras to scan for fevers faster

According to some Amazon employees, the tech giant has begun utilizing thermal cameras throughout warehouses in order to make their screening for COVID-19 more efficient. The cameras are able to calculate the amount of heat that an individual is giving off compared to their environment. Using the cameras will take much less time to take temperatures, and will also require less human contact than the forehead thermometers that Amazon had previously been using to try and track the virus. (Source: Venture Beat)

Why this is important for your firm and clients: As more businesses restart in the new post-pandemic economy, the safety of both customers and employees will be the No. 1 priority. Heat-seeking cameras may be an option, depending on their cost and feasibility. But low-tech solutions like frequent temperature checks are also going to be important.


10. Instagram announced new features for small businesses

Facebook said that small businesses will be getting some help from Instagram, which will be providing ways to simplify the way small businesses can highlight gift cards, fundraisers, and online food orders within their Instagram stories or profiles. Instagram users will now be able to tap on a food order or gift card in order to buy something through the small busines’ website. In addition to the new feature, small businesses using Instagram will now be able to advertise their food, gift cards, and fundraisers through Stories by resharing stickers in an effort to promote followers to throw their support behind other small businesses. (Source: CNBC)

Why this is important for your firm and clients: These are even more reasons for your firm and clients to consider using Instagram as a platform to build your community, advertise and offer products and services. If you’ve got some downtime while quarantined, I recommend taking the opportunity to test out some of these new features.

Note: Some of these stories also appeared on




Wall Street titans see tax hikes whether they like them or not

By Sridhar NatarajanMax Abelson


It’s a line you don’t hear every day from Wall Street titans: Maybe we really should pay higher taxes.

The pandemic has bold-face names like Larry Fink and Lloyd Blankfein thinking out loud that it might be necessary as the coronavirus pandemic derails the economy. A few are even calling for the wealthy to pay up.

Finance billionaires benefited more than just about anyone from President Donald Trump’s massive tax cuts, his signature legislative achievement. Now they’re contemplating the end of that era, underscoring the gravity of the moment.

Just this week, Ray Dalio, the man behind the largest hedge fund, told JPMorgan Chase & Co.’s private-banking clients to expect higher tax rates no matter who wins November’s race for the White House. The mounting fiscal pain across the nation is making the math undeniable to leaders like Fink, who runs the world’s biggest asset manager as chief of BlackRock Inc., and Blankfein, who led Goldman Sachs Group Inc. through the last financial crisis.


“Taxes have to go up — and it will go up at the upper end,” Leon Cooperman, the outspoken hedge fund veteran, said in an interview. “We have to deal with our fiscal situation and stop indebting our children.” He has said he would be willing to pay half of his income to the government.


No one expects Trump to immediately reverse the tax cuts he signed into law when the economy was booming, particularly with his re-election at stake. In fact, even as millions of jobs vanish, the president has talked about cutting payroll taxes and reducing the capital gains rate, another move that would disproportionately benefit the affluent.


But inside executive suites, the debate has already shifted from whether to raise tax rates to a question of how much they’ll go up when the economy starts to recover.


Almost $3 trillion of emergency federal rescue funding has yet to stop the pain from a deadly outbreak that ground entire industries to a halt and forced more than 33 million Americans to seek unemployment benefits. The fallout has left state and local governments’ finances in tatters and is multiplying a federal deficit that was already at $1 trillion a year before the virus even arrived.


Fink predicted this week that the corporate rate could rise by a third next year. Blankfein said the clear need to raise more revenue means corporate taxes will have to go up. His question is how far rates can rise before it becomes counterproductive.


“Raising taxes too much will hamper the recovery, and, particularly for high-tax states, incentivize individuals and companies to leave,” Blankfein said in an email.


His longtime lieutenant, Gary Cohn, was the face of Wall Street’s support for the tax overhaul as he helped guide it after leaving Goldman Sachs to join Trump’s White House. The law slashed corporate rates to 21 percent from 35 percent. That has since helped the nation’s biggest banks churn out record profits and given a boost to rich Americans despite Trump’s promise that they “will not be gaining at all.” Cohn declined to comment.


Critics of the tax cuts have long complained that companies spent the extra cash buying back their own shares to boost stock prices, rather than plowing the money into developing their businesses and adding jobs. Even Trump has complained about how the money was put to work.


Some wealthy Americans who are anticipating higher taxes are in a position to do something about it. Billionaire J.B. Pritzker, the governor of Illinois and heir to the Hyatt fortune, is targeting the rich in his push to raise more revenue for his cash-strapped state. Goldman Sachs veteran Phil Murphy, now the governor of New Jersey and another Democrat, is trying to push a millionaire’s tax, selling it as a matter of fairness.


Not everyone on Wall Street would be happy with paying more. One top executive at a global asset-management firm said he was so disturbed by a plan floating around Albany to boost taxes on the richest New Yorkers that he called an influential state senator to complain.


Dalio, the founder of Bridgewater Associates LP, predicted in 2017 that the Trump tax cuts would only provide a “short-term minor boost” to the economy. Now he thinks they will have to be rolled back to help pay for the response to the pandemic. His statements this week were described by a person who heard the remarks. A spokesman for Bridgewater declined to comment.


Cooperman, the hedge fund manager, has feuded with Senator Elizabeth Warren over her plans to introduce a wealth tax on billionaires, even getting choked up on television as he discussed the debate on the fairness of her proposal. He says he’s in favor of the rich shouldering a bigger burden — but only to a point.


A proposal from Representative Alexandria Ocasio-Cortez of New York to tax the richest Americans at 70 percent “makes no sense,” he said. “It becomes a question of morality.”

— With assistance from Katherine Burton and Heather Perlberg




CFOs hopeful about reopening amid coronavirus, but employees remain fearful

By Michael Cohn

CFOs are cautiously planning to reopen their companies despite the novel coronavirus pandemic to stem the mounting tide of revenue losses, but employees are worried about whether they can return to work safely.


PricewaterhouseCoopers’ fifth biweekly COVID-19 CFO Pulse Survey found 55 percent of the 288 CFOs and finance leaders polled are projecting revenue and profit losses to be more than 10 percent this year, up 2 percentage points from the prior survey. Nearly one-third (31 percent) of CFOs expect layoffs in the next month, a 1 percentage point decrease from two weeks ago.


While 80 percent of the CFOs polled are considering cost containment measures, that’s down from 86 percent two weeks ago. Fewer CFOs are anticipating furloughs over the next month (36 percent, compared to 44 percent two weeks ago).


CFOs are feeling more confident about their ability to protect employees once they return to the workplace. Nearly two-thirds (64 percent) of the survey respondents indicated they’re “very confident” their company can help create a safe workplace environment for employees. Eighty-three percent of respondents plan to change workplace safety measures, up six points from two weeks ago, while 43 percent of the CFOs polled expect to make remote work a permanent solution for roles that can accommodate it.


“One of the clear things we’re seeing right now is that the initial shock of the virus and its effect on the business community is over and we’re seeing a real shift among executives focusing on what they can control,” said PwC US chair and senior partner Tim Ryan during a conference call with reporters Monday. “It’s very clear to us that the most successful companies will be the ones who focus on four critical things, and it’s all around the theme of what they can control. We’re hearing an awful lot about culture, employee safety and employee experience, revenue generation strategies, and cost management, not only today but going forward in the future.”


Last week, along with CFOs, PwC surveyed more than 1,100 American workers to learn the employee perspective. It found they were far less confident that their workplace or commute would be safe. Of those, 39 percent were forced to work remotely or stop working altogether, but are still getting paid. Within this group, more than half (51 percent) said the fear of getting COVID-19 would prevent them from going back to the workplace if their employer asked. Nearly a quarter of the employees (24 percent) said they’re unwilling to use public transportation for their commute and 21 percent cite their responsibility as a parent or caregiver as a reason preventing them from going back to the workplace.


“It goes to our point that you can lead with safety and PPE, but all workers are different,” said Bhushan Sethi, global people and organization co-leader at PwC. “What was interesting in that consumer survey is that 30 percent of them said nothing prevents me from coming back. It shows the different needs for some people who feel they need to be back in a physical workplace, whether it’s out of necessity, fear of job loss, or to be part of the working culture. As firms slowly, steadily, in a sequenced way over the next 12 to 18 months transition back to a physical workplace, they really need to understand the design or the individual considerations that people need.”


Workers are right to be fearful, given the dangers of the deadly virus. “Given the unprecedented nature of this global pandemic, it is clear that workers are very worried about being able to stay healthy and safe as they are asked to return to their offices and worksites,” Ryan said in a statement. "The most important thing business leaders can do to address their employees’ worries is to communicate frequently and transparently about how they are working behind the scenes to keep them safe, healthy and employed.”


PwC has created Check-In with Automatic Contact Tracing, a tool that helps companies identify and alert employees who may have come into contact with a co-worker who has tested positive for COVID-19.


More from the survey

For the first time in the survey, over half (58 percent) of CFOs anticipate that it will take at least three months for their company to return to “business as usual” if the virus were to end today. While 85 percent of respondents expect that COVID-19 will decrease their company’s revenue and/or profits this year (up five percentage points), 6 percent of respondents report that COVID-19’s impact on revenue and/or profits is still too difficult to assess at present (down six percentage points).


In addition, 20 percent of respondents expect a decrease in revenues and/or profits of 25 percent or more. Meanwhile, 58 percent of the CFOs polled are considering deferring or canceling planned investments (down 12 percentage points). Of these respondents, 80 percent (the same as two weeks ago) are considering delaying or canceling facilities/general capital expenditures. In addition, 57 percent (versus 62 percent two weeks ago) are considering workforce investments and 48 percent (the same as two weeks ago) are considering IT investments.


Seventy-three percent anticipate reconfiguring work sites to promote physical distancing (up eight percentage points), while 58 percent expect to change and/or alternate shifts to reduce exposure (up six percentage points).

Many CFOs are still expecting layoffs, furloughs and other cost reductions. “In terms of cost cutting, 80 percent are considering cost containment measures,” said PwC's chief clients officer Amity Millhiser. “This is down slightly from the last time we ran the survey, but it’s still the overwhelming majority of the CFOs. In terms of the areas of cost cutting, the expectations of layoffs over the next month seem to be holding steady at about 31 percent. Fewer CFOs are anticipating furloughs over the next month. This time, it’s 36 percent versus 44 percent two weeks ago. These statistics reflect that in those industries that were most significantly affected out of the gate by the COVID virus — think about the hospitality industry, travel industry and retail industry — many of them have already taken layoffs and furlough actions early on in the past couple of months, so these numbers probably reflect the significant actions those sectors have taken already.”


PwC isn’t the only Big Four firm that has been surveying CFOs lately about the coronavirus pandemic. Deloitte released a survey last Wednesday of a group of 166 CFOs. It asked them how long it will take for recovery to pre-crisis levels: Nearly 60 percent said they do not expect their operations to return to near-normal levels in 2020. The retail/wholesale sector is especially pessimistic.


Deloitte also asked how organizations plan to resume business operations and succeed in this environment. Approximately half the CFOs polled said they plan to open local offices and operations as soon as their local and/or state governments allow it. Around 60 percent of the CFOs surveyed said their investments in technologies for virtual and automated business operations will increase over the next 12 months. When asked what kinds of changes they expect in their workforces, about two-thirds of the CFOs polled say they expect their workforce to be within 10 percent of its current size a year from now. The retail/wholesale and services sectors are the most likely to expect substantial reductions.


Research firm Gartner has also been polling CFOs about their attitudes. In the latest poll, conducted May 3, Gartner surveyed 161 finance executives, and found that in May and June the number of companies furloughing staff, as well as cutting salaries and workforce, will have more than doubled since the end of March. Eleven percent of the respondents said they reduced staff in March, and 25 percent plan to reduce their staff in May and June.


Tax Noncompliance: Greed on Steroids

by James Edward Maule


Readers of MauledAgain know that I have no sympathy for starving oligarchs who use some of their wealth to lobby for tax cuts that increase their wealth by more than the costs of lobbying, who fail to create most of the jobs they claim the tax cuts will permit them to create, and who in some instances respond by cutting existing jobs. Readers also know that I have warned that the failure of Congress to provide adequate resources to the Internal Revenue Service contributes to lax tax enforcement and promises to add to the erosion of revenue already underway because of multiple instances of unnecessary tax handouts to the wealthy and large corporations.

About a week ago, the Treasury Inspector General for Tax Administration issued a report, the title of which serves as a warning: High-Income Nonfilers Owing Billions of Dollars Are Not Being Worked by the Internal Revenue Service. The news is bad.

After pointing out that the tax gap – the shortfall between what the law requires taxpayers to pay and what taxpayers are in fact paying – is estimated to be $441 billion for 2011, 2012, and 2013, the report reveals that $39 billion is due from taxpayers who fail to file tax returns. Most of this shortfall is attributable to “high-income nonfilers.” The Inspector General determined that although the IRS is developing a new approach to dealing with nonfilers, it has not yet implemented that approach, and when implemented, it will be “spread across multiple functions with no one area being primarily responsible for oversight.”

Worse, the Inspector General determined that for taxable years 2014 through 2016, 879,415 high-income nonfilers failed to pay roughly $45.7 billion in taxes. Of those 879,415 high-income nonfilers, the IRS did not pursue 369,180 of them, accounting for an estimated $20.8 billion in unpaid taxes. Of the 369,180 were not put into the queue for pursuit of the unpaid taxes and the cases for 42,601 were closed without further action. The other 510,235 of the 879,415 high-income nonfilers “are sitting in one of the Collection function’s inventory streams and will likely not be pursued as resources decline.”

Even worse, because the IRS works on each tax year separately rather than combining cases when a taxpayer fails to file for more than one year, it “is missing out on opportunities to bring repeat high-income nonfilers back into compliance.” Of these high-income nonfilers for 2014 through 2016 that the IRS failed to address or resolved, the top 100 owed an estimated $10 billion in unpaid taxes. The Inspector General has proposed seven changes to deal with these problems, but the IRS agreed in full only to two of them, partially agreed with four, and disagreed with one. The IRS objected to putting the nonfiler program under its own management structure.

Here and there a failure to file arises from an understandable problem, such as a taxpayer falling ill without anyone realizing it in time, or developing dementia or similar mental impairments. Sometimes the failure to file arises from financial setbacks for taxpayers who don’t realize that in those situations it is best to file and indicate the inability to pay. Some instances of failure to file are expressions of principled protest against specific government policies. A significant portion reflect a deep greed rooted in a taxpayer’s perception that they have no obligation to contribute to society, with the failure to file and pay almost always defended as a justified expression of the taxpayer’s anti-tax philosopy.

Is it any wonder that so many people are enraged? Though there are many ingredients fueling social unrest, an important one is the growing sense among Americans that they are fools for complying with tax laws when “high income nonfilers” are “getting away with it.” Would it be a surprise if more taxpayers choose not to file, knowing that the IRS lacks the resources to chase them down? This sort of mob mentality is no less likely to spread among taxpayers as it can spread among crowds encouraged to break other laws.

Though it is easy to suggest that Congress needs to wake up and provide sufficient funding to the IRS, especially because every dollar invested returns roughly seven, but the Congress is incapable of doing this. Enough of It is controlled by the anti-tax, anti-government crowd that it lacks the ability to do what needs to be done. Until the makeup of the Congress changes, the tax gap will persist and even increase, adding to the growing deficit that threatens to cause havoc more catastrophic than what currently afflicts the nation. The greed that is fueling the income and wealth inequality contributing to so many of the nation’s problems is growing as though on steroids, and needs to be neutralized expeditiously.




The COVID-19 Crisis Reveals The President’s Misplaced Budget Priorities

C. Eugene Steuerle


Presidential Budgets reveal much about the priorities of an administration. President Trump’s fiscal year 2021 budget, released in early 2020, proposes almost no additional resources for workers, children, young and middle-age families, and most of the traditional functions of government.


In a recent study based on a new budget accounting framework, Erald Kolasi and I focused on priorities of that FY 2021 budget, as revealed by the total change in real (adjusted for inflation) spending, taxes, and deficits that it proposed. A related study, prepared by Julia Isaacs and other colleagues at the Urban Institute, focused on how the Trump budget proposal treated children versus other aspects of the economy over the upcoming ten-year period.


The FY 2021 budget projects the effects of the policies proposed for the coming decade, through 2030. When comparing the fiscal situation for 2030 to that for 2019, we find that almost all growth in real spending proposed in the President’s budget, other than interest on the debt, would go for Social Security and Medicare. Spending for everything else in aggregate would decline significantly in real dollars, as a share of total spending, and as a share of GDP.


Moreover, the growth in Social Security and Medicare alone would absorb almost all the nearly $1 trillion growth in total revenues over the decade. Higher interest on the debt, the one other area of major spending growth, would be covered partly by revenues and mainly by more federal borrowing.




IRS isn’t working on cases involving high-income nonfilers who owe billions

By Michael Cohn


The Internal Revenue Service hasn’t been doing enough to collect the taxes owed by hundreds of thousands of people who don’t file their taxes and owe billions of dollars, according to a new report.


The report, from the Treasury Inspector General for Tax Administration, estimated that approximately $39 billion of the $441 billion average annual tax gap, or 9 percent, can be attributed to nonfilers, that is, individuals who don’t file a tax return on a timely basis or pay the taxes due on their delinquent returns. High-income nonfilers who earn at least $100,000 a year, while fewer in number, contribute to the majority of the nonfiler tax gap, according to the IRS.


TIGTA analyzed the inventory of nonfilers for tax years 2014 through 2016 and identified 879,415 high-income nonfilers who didn’t satisfy their filing requirements, with estimated taxes collectively due of $45.7 billion.


Of those 879,415 high-income nonfilers, TIGTA found the IRS didn’t work on 369,180 of their cases, though the total estimated tax due amounted to $20.8 billion. Of those 369,180 high-income nonfilers, 326,579 were not placed in inventory to be selected for work and 42,601 were closed out of the inventory without ever being worked on by the IRS. The remaining 510,235 high-income nonfilers, with a total estimated tax due of $24.9 billion, are sitting in one of the IRS Collection function’s inventory streams and probably won’t be pursued as resources at the agency decline. The IRS has already removed high-income nonfiler cases from its inventory, resulting in 37,217 cases totaling $3.2 billion in estimated tax dollars that probably won’t be worked on by the IRS.


Thanks to the IRS’ policy of working on just single-tax-year cases no matter how many returns haven’t been filed by a taxpayer, the IRS is missing out on opportunities to bring repeat high-income nonfilers back into compliance, according to the report. TIGTA identified the top 100 high-income nonfilers for tax years 2014 through 2016 that the IRS didn’t address or resolve. They had estimated taxes due totaling $9.9 billion.


The IRS is trying to address the problem, but it’s still in the process of conducting testing on a new strategy of dealing with nonfilers. TIGTA acknowledged that the service’s new nonfiler strategy seems to approach nonfiling in a more strategic manner. “However, the strategy has not yet been implemented, and TIGTA identified that the new nonfiler program is spread across multiple functions with no one area being primarily responsible for oversight,” said the report. “In addition, more needs to be done to address high-income nonfilers.”


TIGTA made seven recommendations in the report, including designating a senior management official with appropriate resources and specific nonfiler duties to address nonfilers, not pausing the nonfiler program, working on multiple-tax-year cases, and not removing high-income nonfiler cases from the inventory without resolution.


The IRS disagreed with one of TIGTA’s recommendations, but it agreed with two others, and partially agreed with four more. The IRS agreed not to pause the Individual Master File Case Creation Nonfiler Identification Process in the future, unless there are unusual circumstances, but it disagreed with placing the nonfiler program under its own management structure.


Eric Hylton, commissioner of the IRS’s Small Business/Self-Employed Division, pointed out that the agency has faced staffing challenges that have made it difficult to spend as much time on enforcement. “The issues TIGTA found in this audit are reflective of the resource challenges the IRS has faced in recent years,” he wrote in response to the report. “Since FY 2010, the IRS has lost nearly a third of its enforcement personnel, including more than half of its revenue officers (the Collection employees who work the most complex cases). To address this trend of declining resources, our budget request included funds for new and continuing investments in expanding and improving the effectiveness and efficiency of our overall tax enforcement program.”


Sen. Ron Wyden, D-Oregon, the ranking Democrat on the Senate Finance Committee, blamed Republicans for years of budget cuts at the IRS. “As a result of Republicans' years-long effort to gut the IRS and protect their donors from scrutiny, wealthy tax cheats stole nearly $46 billion in just three years by refusing to even file their taxes,” Wyden said in a statement Monday. “What's worse, the IRS did little to nothing to pursue these tax cheats. Investments in health care, infrastructure and education will be perpetually short-changed if paying taxes is essentially voluntary for those at the top. The IRS needs historic investments to address this crisis.”


Most of the spending growth reflected in the President’s budget already is baked into current law and will occur even if Congress enacts none of his proposals. The left-hand or blue bar in each pair of bars in the figure shows the projected 10-year increase in federal spending under current law. The difference between current law and the president’s budget (each right-hand or orange bar) represents the additional legislative changes proposed in the budget. Primary among those legislative proposals are cuts of about $200 billion in both revenues and all government programs other than health and Social Security, that is, most non-defense and defense programs. His main legislative priority in healthcare is to reduce significantly the additional spending for Medicaid and for the exchange subsidies under the Affordable Care Act (ACA)—the dominant items in the “other health programs” category in the graph.


To be fair, we should note that President Obama’s proposed budget for fiscal 2017 called for 91 percent of all growth in spending to go for Social Security, healthcare and interest on the debt from 2016 to 2026. Moreover, some proposed Medicare payment reforms in the Trump budget are similar to items in the Obama budget. President Obama’s long-term budget proposals mainly differed from President Trump’s by increasing rather than decreasing taxes, by increasing rather than cutting support for Medicaid and ACA exchange subsidies, and by holding fixed in real terms rather than significantly cutting other spending, particularly non-defense discretionary spending.


The COVID-19 pandemic shows the need for different spending priorities

The priorities in the President’s budget can be compared to dramatically different priorities revealed in the Congressional response to the current health and economic crises.

  • Whereas the President’s budget would devote almost all additional resources to the retired and elderly population, the COVID-19 response legislation enacted to date focuses on supporting workers and working families.
  • Whereas the President’s budget largely neglects children, enacted and proposed COVID-19 response legislation would provide additional support for children through direct cash assistance, temporary increases in the Earned Income Tax Credit and the Child Tax Credit, and increases in food and nutrition programs.
  • Whereas the President’s budget devotes almost all additional health resources for acute care, the Congressional COVID-19 responses focus significant attention on the need for preventative care, as revealed in additional spending directed at testing, protective equipment, and vaccine research.
  • Whereas the President’s budget significantly pares health spending for Medicaid and Accountable Care Act (ACA) exchange subsidies, they are the very sources to which many of the unemployed and those without employer-provided insurance will turn in this crisis.
  • Whereas the President’s budget would increase the share of spending through entitlement programs that inflexibly pre-determine how additional money should be spent, the response to the COVID-19 crisis demonstrates the need for robust discretionary spending programs that can adapt to changing needs.


I suggest that these new priorities result not merely from the short-term needs that have arisen from the COVID-19 pandemic but from those pressures on working families that have grown over time. While abandoned in the proposed Trump budget, non-health spending on these households was also given low priority in budgets even before he came into office. Had the federal government given more attention to those needs, we might have been better prepared to meet them when an economic downturn occurred.


Will the COVID-19 crisis awaken our elected officials to a rational long-term budget policy that includes needed investments in future generations? Will the crisis teach us to target resources better as society’s needs and opportunities evolve?  We shall see.



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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