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The 2017 Tax Legislation: A Failure From Every Direction

by James Edward Maule


Readers of MauledAgain know that I have been a critic of the 2017 tax legislation, because it is terrible for most Americans, is mostly a giveaway to the oligarchs, is sloppily drafted, and has caused all sorts of unintended but adverse consequences for taxpayers least able to handle those consequences. I have criticized this tax “reform” mess since the legislation first started making its way through a Congress insensitive to the plight of most Americans. I have written about the flaws of that legislation in posts such as Taxmas?Those Tax-Cut Inspired Bonus Payments? Just Another RuseThat Bonus Payment Ruse Gets BiggerGetting Tax Cut Benefits to Those Who Need Economic Relief: A Drop in the Bucket But Never a FloodOh, Those Bonus Payments! Much Ado About Almost Nothing

You’re Doing What With Those Tax Cuts?Much More Ado About Almost NothingMore Proof Supply-Side Economic Theory is Bad Tax PolicyArguing About Tax CrumbsAnother Reason the 2017 Tax Cut Legislation Isn’t Good for Most AmericansYet Another Reason the 2017 Tax Cut Legislation Isn’t Good for Most Americans Is Holding On To Tax Cut Failures Admirable Perseverance or Foolish Stubbornness?What’s Not Good Tax-Wise for Most Americans Is Just as Not Good for Small BusinessesDon’t Want a Crumb? Here’s Dessert But Give Back Your Appetizer and BeverageHow Tax Cuts for Large Corporations and Wealthy Individuals Impact Jobs, and Broken Tax Promises: When Tax Cut Crumbs Are Brushed Away.

Now comes a Congressional Research Service report, as described in various stories, including this one from Forbes, that concludes the 2017 legislation “had little measurable effect on the overall US economy in 2018.” The report concludes that “the tax cuts didn’t come remotely close to paying for themselves by turbocharging the economy as President Trump repeatedly promised.” The Forbes story notes that the report’s conclusions surprised almost no one, because “most independent analysts predicted more than a year ago that the law would have little economic impact.” It’s nice to know I was not alone.

In response to the report, acolytes of the failed supply-side, trickle-down nonsense now claim that the legislation’s supporters “never really promised a big short-term burst of economic growth/” Really? It’s so sad that so many people have such short memories

So what did the 2017 legislation do, aside from making a mess of things for taxpayers of modest or little means? It “substantially lower[ed] effective corporate tax rates and generate[d] a flood of stock buybacks and dividends for shareholders.”

What did the 2017 legislation not do? It didn’t pay for itself, causing a dangerous surge in the national debt, which will end up being a burden for taxpayers of modest and little means, unless, of course, the unwise 2017 enactment and its consequences are reversed by a future Congress and Administration that represents all Americans and not just oligarchs, large corporations, and their apologists. Similarly, the 2017 legislation did not bring the typical worker the promised $5,000 annual salary increase. Adjusted for inflation, wages “grew more slowly than overall economic output, and at a pace relatively consistent with wage growth prior to passage of the TCJA.” If salary increases for the oligarch class are removed from the wage computation, the salary situation for the rest of working America is even worse. Attempts to obscure the failed promises attached to the legislation that focused on bonus payments must be evaluated in light of the fact that “reported bonuses were equivalent to about $28 per US worker.”

The 2017 tax legislation is a failure. It was sold to the public as something other than what it is. Unfortunately, it has become too easy in this day and age to con people. The con artists are alive and well, and they’re not just making robocalls.




U.S. business contributes smallest share of taxes in generation

By Alex Tanzi


U.S. corporations are contributing the smallest share of federal tax revenue in a generation.

That’s one of the findings in the Data Book for 2018, released by the Internal Revenue Service on Monday. In the fiscal year covered, the IRS processed more than 250 million tax returns and collected nearly $3.5 trillion in federal taxes paid by households and businesses.


The data show that the burden is increasingly falling on individuals. Their income taxes account for about $1.95 trillion, or 57 percent of total revenue. An additional 33 percent came from employment taxes. Corporations only paid 7.6 percent of the tax take — the lowest share since at least 1960, according to the IRS data.


After adjusting for refunds, the share may be even lower. Businesses got more than $60 billion back from the IRS, lowering the net collection amount to $202.7 billion.


The IRS report also provided data on tax audits and taxpayer attitudes. About two-thirds of respondents agreed that it’s their civic duty to pay their fair share of taxes, and an even bigger majority said that it’s not acceptable to cheat.


There were some outliers, though. About 3 in 100 taxpayers said it’s acceptable to cheat “as much as possible.”




Health care, student loan forgiveness among graduates' top desires

By Sean McCabe


As graduation season approaches for college students across the country, student loan forgiveness is on a lot of young job seekers' minds.


When asked to list the top three benefits that would help them achieve their financial goals, respondents listed health insurance and paid time off first and second, respectively, with student loan forgiveness listed third. Comparatively, only 36 percent of young job seekers listed a 401(k) match as a top-three benefit. The online MAVY Poll was conducted on behalf of the American Institute of CPAs.


“Early career decisions often have a major impact later in life,” stated Gregory Anton, chairman of the AICPA’s National CPA Financial Literacy Commission. “A mentality of ‘I’ll start saving when I get a bit older’ often results in retirement savings being put on the back burner. However, by beginning to save towards retirement as early as possible, new graduates will benefit from decades of compounding growth. Time is an asset, and those just starting their career are in a prime position to take advantage of it.”


While student loan forgiveness was the third most sought-after benefit overall, respondents with outstanding loan debt viewed student loan repayment as the most important use of their benefits. When given a hypothetical $100 to have an employer split between paying a portion of their student loan debt versus putting it towards a specific benefit, respondents with student loan debt opted to have the employer put more money towards paying off their student loan debt in all cases.


“Student loan debt can cause recent graduates to make the mistake of looking past the benefits an employer is offering and just focus on the salary," added Anton. "Wide disparities between health insurance options, employer retirement contributions as well as vacation and sick leave underscore the need for prospective employees to fully understand the value of the benefits being offered to them."


Other notable survey findings include:

  • Sixty-four percent of respondents said they plan to return to school at some point.
  • A Bureau of Labor Statistics report found Baby Boomers held an average of 11.9 jobs from the ages of 18 to 50. When asked, poll respondents said they expect to work, on average, 4.6 jobs in their lifetime.
  • Eighty-seven percent of respondents are confident they understand all the workplace benefits available to them. Eighty-five percent are also confident they will use the benefits available to them to their fullest potential.
  • Sixty-eight percent of respondents expect the value of employer benefits to increase in the future.

The survey was distributed to 1,984 young adults between the ages of 18 and 34 in the U.S. in September 2018. In all, 547 respondents — who have either graduated from college in the last 24 months or will graduate in the next 12 months — responded, with all currently seeking employment. For the full results of the survey, head to the AICPA’s 360 Degrees of Financial Literacy site here.




‘Cross-border royal baby tax compliance’

By Roger Russell


A recent decision in the U.S. District Court for the Central District of California may have a cautionary impact on Archie Harrison Mountbatten-Windsor, the son of Prince Harry and American Meghan Markle, currently the seventh in line to the British throne.


The little prince, born May 6, 2019, is automatically a dual citizen, and won’t be able to renounce his U.S. citizenship for some years. And as a U.S. citizen, he is subject to the FBAR filing requirements, among other provisions of the U.S. Tax Code.


The decision in U.S. v. Boyd, filed April 23, 2019, granted summary judgment to the Internal Revenue Service in penalizing the taxpayer, Jane Boyd, for her failure to file a Foreign Bank and Financial Accounts, or FBAR, form for each of her accounts in the U.K. In assessing the 13 separate FBAR penalties against Boyd, the IRS treated each account that was not listed on a timely filed FBAR as a separate, non-willful violation. The amount of each FBAR penalty was computed based on the highest balance contained in the account during 2010.


“The language of the FBAR rules limits the penalty up to $10,000 on any person -- but it’s not explicit as to whether it applies on a per-year or per-account basis,” said Becca Chappell, of counsel at law firm Venable LLP. “Historically, it’s been interpreted to mean ‘per year,’ but the IRS has reserved the right to apply it on a per account basis.”


The district court acknowledged some ambiguity in the statute, but said the “more reasonable” interpretation was to apply it on a “per account” basis.


“Defendant argues that the plain language of [the code language in question] supports her position that a non-willful penalty for a given year cannot exceed $10,000. Defendant argues further that had Congress intended to impose a penalty based on each bank account required to be shown on the FBAR, Congress could have easily included such explicit language,” the judges wrote in their opinion. “The court disagrees with defendant that the relevant statutory language clearly supports her position. Rather, the Court views [the statute] as somewhat unclear as to whether the $10,000negligence penalty applies per year or per account.”


“Nonetheless, given the relevant language the government highlights … the court determines that the government has advanced the more reasonable interpretation,” they concluded.


It may seem more reasonable to the court, but it seems very unreasonable to taxpayers seeking to comply with a myriad of confusing requirements to be penalized in such extreme fashion. Shouldn’t ambiguity be resolved in favor of a non-willful taxpayer?


“It’s a procedural issue, and it’s easy for someone to overlook when they’re thinking about annual compliance,” said Chappell. “But the risk is very material even for an inadvertent failure to file.”


“This ruling will likely apply to many people, because people often have multiple accounts. It’s a relevant risk for them,” Chappell said. “I don’t think her actions were deliberate, but the ruling is consistent with an overall global trend toward transparency with respect to financial information.”


“This case underscores the urgency for practitioners to make sure that they annually ask all clients if they have any foreign accounts or foreign assets,” said New York-based CPA Vincent O’Brien, of Vincent J. O’Brien CPA PC. “In today’s global economy, such accounts are more and more common, and the penalties for failing to meet the reporting requirements are severe.”

As another CPA quipped, “This may be the beginning of a trendy new tax niche — cross-border royal baby tax compliance.”




Millennials and Gen Z less optimistic about future of traditional business, survey finds

By Sean McCabe


Millennials and members of Generation Z have grown skeptical of traditional business models and are pessimistic about the economy and social progress, according to the 2019 Deloitte Millennial Survey, released on Monday.


The 2019 report polled a total of 16,425 young people — 13,416 millennials (born between January 1983 and December 1994) across 42 countries, and 3,009 Gen Z respondents (born between January 1995 and December 2002) across 10 countries.


Across both generations, traditional work-life goals have changed drastically. While more than half of respondents stated they would like to earn high salaries, traditional milestones such as starting a family was not cited as a top priority. For instance, 59 percent of respondents said they would rather travel and see the world versus buy a home (49 percent), as well as help their communities (46 percent) over have children (39 percent).


“From the economic recession a decade ago to the Fourth Industrial Revolution, millennials and Gen Zs have grown up in a unique moment in time impacting connectivity, trust, privacy, social mobility and work,” stated Michele Parmelee, Deloitte's global chief talent officer. “This uncertainty is reflected in their personal views on business, government, leadership and the need for positive societal change agents. As business leaders, we must continue to embrace the issues resonating most with these two generations, or risk losing out on talent in an increasingly competitive market.”


Respondents' trust in the global economy also fell to its lowest level in six years, with only 26 percent of respondents expecting economic conditions in their countries to improve over the next year (compared to 45 percent a year ago). Millennial opinion on businesses have also declined, as 55 percent of respondents see businesses having a positive impact on society, compared to 61 percent in 2018.


Income inequality and unemployment were also cited as top challenges facing the working world today. Approximately two-thirds of millennials believe that some people are not given a fair chance at achieving success in the world. Respondents also believe that the government is most responsible for improving social mobility, but don't believe it is one of government’s current priorities.


"We have less trust in employers because so many of our parents did lose their jobs, and they had been loyal to companies," said Laura Banks, an American millennial cited in the report. "We have less trust in the stock market because it crashed. And I think that a lot of us are worried that it is going to happen again. We are either putting off big life moments and keeping money in our savings [accounts], or we’re saying, ‘You know what? It could fall apart again tomorrow. Let’s travel the world.'"


Asked about technology in the workplace, 46 percent of respondents believe that the changing nature of work will make it tougher to find or change jobs, while another 70 percent believe they may not have all the skills required to thrive in the modern workplace. Millennials believe that businesses are most responsible for training them with new on-the-job skills, while Gen Z believes the responsibility lies with academia.


“Millennials and Gen Zs are conflicted about the role of technology, and they are looking to business to help them adjust to a new normal,” added Parmelee. “To attract and retain young employees, businesses should bolster their diversity and inclusion initiatives, find new ways to incorporate these generations into corporate societal impact programs and place a priority on reskilling and training to ensure talent is prepared for what’s ahead.”


Other notable findings from the report include:

  • Climate change was the top issue facing society, according to both millennials and Gen Z.
  • Seventy-three percent of respondents said political leaders are failing to have a positive impact on the world. Two-thirds say the same of religious leaders.
  • Forty-three percent of respondents said that traditional media is negatively impacting the world, with 27 percent citing no trust in the media as a reliable source of information.
  • Sixty-four percent of respondents believe they would be healthier if they reduced their social media consumption, with 41 percent wishing they could stop using social media entirely.
  • Seventy-eight percent of respondents are worried about how businesses share personal data with each other. Seventy-nine percent of respondents are worried that they will be victims of online fraud.
  • Forty-two percent of respondents have engaged more with businesses that they perceive are having a positive impact on society or the environment. Conversely, 38 percent have ended or disengaged their relationships with companies perceived to be having a negative impact on society.


In addition to releasing the Millennial Survey, Deloitte announced the launch of a new tool, the “MillZ Mood Monitor,” which will track respondents’ annual optimism on key political, personal, environmental and socio-economic topics. In the inaugural Mood Monitor, millennials posted a score of 39 (out of 100), while Gen Z scored 40.


For the full 2019 Millennial Survey, head to Deloitte's site here.




Which business entity your clients have matters a lot to their taxes

By Jeff Magson


While there was a lot of hype and media coverage of the anxieties of individual taxpayers this year, the small business owner need not feel overlooked. That is because the 30 million or so small businesses across America were all asking the same question: Am I operating in the correct entity to maximize tax savings?


This question has been ongoing ever since the Tax Cuts and Jobs Act of 2017 was enacted. Interpretation of this portion of the tax code has undergone numerous IRS clarifications over the past year. While this meant for a very challenging few months during tax season, it also meant tax preparers acquired a significant amount of knowledge and understanding that provided them with the ability to help business owner clients navigate these treacherous waters moving forward.

Large companies operating as C corporations saw the greatest benefit as their tax rates dropped significantly from 35 percent to 21 percent. Even though small businesses did not receive the same double-digit tax windfall, they were certainly not left out.


Sean Lydon, CPA, ABV, provides private wealth management and accounting services to his firm’s clients in the Washington, D.C., metropolitan area. As a CPA wealth manager, Lydon and his firm work with over 70 small businesses, ranging from startups to businesses with annual revenue of $180 million. He recently provided some insight into common concerns he is hearing from his business owner clients and how he’s advising them.


With so many small businesses conducting business in various ways — from independent freelancers to doctors and lawyers to manufacturers to retail operations — tax advisors must look at each individual business operation and business segment individually.


While the Tax Cuts and Jobs Act gave significant tax breaks to S corporations and LLCs, operating as a C corp could still have its benefits. If a company is accumulating profits to repay debt or to fund capital expenditures, a C corporation could allow it to retain more profits on an after-tax basis than if it was organized as an S corporation or LLC. On top of this, for small business owners considering a sale of their business, a C corporation has the potential benefit for its shareholders to take advantage of the qualified small business stock provision that allows them to exclude 100 percent of the gain from the sale of their stock from income taxes.


However, despite the potential benefits of a C corporation, perhaps one of the greatest opportunities created by the Tax Cuts and Jobs Act of 2017 is related to electing S corporation status. Businesses that have avoided this in the past should re-evaluate this decision, as there may be substantial tax savings for companies with low debt, and low cap-ex requirements.

Section 199A Created a New, but Opaque Opportunity


Lydon advises small business to do a deep analysis of the application of Section 199A and the deduction for qualified business income (QBI). While there is potential for substantial tax savings for business owners, companies looking to benefit from this new pass-through entity deduction do not have a clear or uniform means for capturing this opportunity. The tax preparer must assess every entity, and each business segment within each entity, on a case-by-case basis to develop individualized guidance.


Maximizing Tax Minimization Strategies

The 2017 tax law also provides opportunities for tax-smart income planning. For example, in the case of service businesses, such as doctors and lawyers, it’s important to try to keep the owner’s taxable income below $415,000, and as close to $315,000 as possible. The use of a cash balance defined benefit plan can be very useful in creating tax deductions by putting additional funds in an account that grows tax free. As a hypothetical illustration, consider the following: A “service” business owner with $415,000 of taxable income makes an additional $100,000 of contributions to a cash balance plan; if they had $415,000 of taxable income before this contribution, this $100,000 contribution would lower taxable income to $315,000 and could create a tax savings of $50,000 to $60,000, depending on the state.


Small business clients with sales up to $25 million can also benefit from electing an accounting method that changes them from an accrual basis to cash basis, which provides a one-time tax windfall and other planning opportunities for future years.


Plan for Today…and Tomorrow

While the official “tax season” may be over, the “tax planning” season never ends. Performing a four-to-five-year tax projection is critical to effective tax planning. This forward-thinking process is critical for analysis and tax bracket management strategies, such as grouping charitable contributions, harvesting capital gains in a lower-income tax year, opening a donor-advised fund and using a charitable trust.


As a small business grows in size and owners move into a high-net-worth category, exploring estate planning opportunities becomes increasingly important. The transfer of wealth, sale of a business or passing it on to loved ones and family members all carry potential tax consequences, and clients can benefit from early consultation with a trusted advisor.


For high-net-worth clients that already have or are looking to possibly establish LLCs or trusts for their family, the window on the higher estate tax exemption is an opportunity to save substantial estate tax by gifting appreciating assets to family members at a discounted value into a family LLC or trust.


Whether a client owns a small business or a high-growth enterprise, it’s always important they understand there are a number of tax-minimizing strategies that can be deployed. Working with a trusted advisor, especially one with knowledge of both the tax and financial planning sides of the equation, is critical as we continue to adjust to the “new normal” created by the Tax Cuts and Jobs Act of 2017.




The new marriage penalty

By Roger Russell


For people for whom being married is penalty enough, imposing a fee on top of it for the privilege of being married is adding insult to injury. But that’s what the marriage penalty tax does.


There’s no section in the Tax Code titled “Marriage Penalty Tax,” but it is a consequence of the code, observed Joyce Beebe, a fellow in the Center for Public Finance at Rice University’s Baker Institute for Public Policy.


“For the last half century, many Americans have paid higher income taxes after they marry because they stop filing their tax returns as single individuals and instead file joint returns,” she said. “Some of them also see reduced tax credits or lower tax preferences.”

“The cause of the marriage penalty is rooted in three objectives of the U.S. tax system that are intrinsically conflicting,” she observed. “A progressive tax system, treating the family as a unit, and marriage neutrality are all worthy objectives, but they can’t all be met at once,” she explained.


Taxing the family as a unit as opposed to taxing the members as individuals is designed to ensure that households with the same income pay the same amount of income taxes, regardless of who earns the income, she explained: “A couple whose income is split $200,000 and $0 should have the same tax liability as a couple that earns $100,000 and $100,000. Because families can pool resources together in ways that individuals cannot, the tax system views the family as a tax unit, instead of the individuals within the family. The third objective, marriage neutrality, means that a couple’s marital status should not influence their tax liability.”


“But you can only achieve two out of three of these objectives in any system,” she continued. “Every country has to choose which two of the three they would like. We decided a long time ago — 50 years, in fact — that we would not keep marriage neutrality, or that we would sacrifice part of it because the other two are more important.”


The Tax Cuts and Jobs Act has somewhat improved the situation, according to Beebe.


“The tax rates and tables make things better under the TCJA,” she said. “Prior to the TCJA, two unmarried people who both earn $100,000 would each pay $18,139 in taxes, or $36,278 total,” she said. “After marriage, the couple would pay a combined $37,060 in taxes, an increase of $782,” because joint reporting pushes some of their income into the higher 28 percent bracket.


“For this couple the tax system treats them jointly as a unit and maintains the progressive rate structure, which satisfies the tax system’s first and second objectives,” she said. “However, they pay more tax as a result of the marriage, which violates the marriage neutrality principle.”


Two proposals to ameliorate the marriage penalty — widening the tax brackets and raising the standard deduction for joint filers — were incorporated in the TCJA, Beebe observed. But the TCJA’s $10,000 SALT cap works the other way, she indicated: “Two single taxpayers can each claim $10,000 on their return, but a married household filing a joint return only gets to claim $10,000. They didn’t really intend to impose a penalty on a married couple with the SALT cap, but that’s essentially what they did,” she said.



Income range: Single filers

Income range: Joint filers




















Over $500,000

Over $600,000

Beebe, who was at several Big Four firms prior to her research fellowship at Rice University, said she decided to volunteer for the Volunteer Income Tax Assistance program this past tax season. “Low-income taxpayers were not our clientele, and it was one area I never touched,” she said. “I saw how important the Earned Income Tax Credit is for these people. It didn’t change much under the TCJA. What really impacted them was the standard deduction and the repeal of personal exemptions.”


“If I file as a head of household — I’m a single mother with one child — I have a standard deduction of $18,000. Suppose I meet a nice guy and we decide to get married. If he’s single, his standard deduction is $12,000, so we have $30,000 between the two of us,” she said. “But if we get married, our standard deduction as joint filers will be $24,000, so we’ve lost $6,000 right there. To make matters worse, let’s say he also has one child and files as a head of household. Our combined standard deduction before marriage is $36,000. By getting married, our standard deduction as joint filers is $24,000 so we lose $12,000 of the standard deduction.”


In attempting to address the marriage penalty issue, there are a number of provisions that are easy to adjust if lawmakers so desire, Beebe suggested. “These include equalization of the Social Security base amounts between couples and individuals, EITC thresholds and standard deduction amounts. However, certain policies that reduce the marriage penalty may result in enhancing the marriage bonus, tilting the pendulum the other way. Provisions such as equalization of Social Security benefits for two- versus one-earner families, and creating incentives for low-income secondary earners with children to enter the workforce require more fundamental changes to the current system. But they are worthy goals that reflect the long-term demographic trends in the U.S. economy."




4 red flags that can trigger a residency audit

By Anupam Singhal


Tax season may be over, but that doesn’t mean your clients’ chances of being audited at the state level disappear. There are circumstances, factors, and financial and life events that occur throughout the year that could become red flags that trigger state residency audits. If the taxpayer is a high-net-worth or high-income earner, the likelihood of being audited becomes even greater.

As states seek to fill revenue gaps and recover tax revenue losses, the risk of state residency and non-residency audits continues to grow. The risk has become so great that tax experts say that if you’re a high-net-worth or high-income individual and you move or create a similar type of red flag, there is a 100 percent chance that you’ll be audited by the state. With this in mind, here are four risk factors to monitor for your clients throughout the year.

1. Moving to low- or no-income tax states

As people continue to flee high-tax states like New York, California, Connecticut, New Jersey and Illinois, and are moving to low- or no-income tax states like Florida, Arizona, Wyoming, Texas and the territory of Puerto Rico, high-tax states are losing a significant amount of tax revenue. Millions of dollars are at stake, and as a result, this trend is prompting states to become more aggressive with domicile, residency and non-residency audits, and they are conducting these audits with a higher level of scrutiny.


If your client is in the highest income tax brackets and they move, consider an audit a certainty and help them be prepared. One tip is to minimize the number of demonstrable ties to the original state. This will show that the taxpayer has indeed moved and intends to stay in the new state. In addition, help your client collect as much data about their day-to-day whereabouts as possible so that they can prove that they did indeed move and are spending the majority of their time in the new state. When it comes to audits, the taxpayer is “guilty until proven innocent” and the burden of proof is on the taxpayer.


Collecting this data does not need to be as onerous as it once was. You’ve probably heard the same stories that we have about people trying to establish and prove their domicile and residency -- shoeboxes full of paper receipts, handwritten diaries, strategic credit card swipes, and even people posing for photos in front of their homes holding the day’s newspaper. Today, there are ways to automate location tracking and digitize the collection of data to show proof of domicile and residency. Many taxpayers don’t know about this technology, putting tax advisors in a strong position to bring something to their clients.

2. Purchasing and traveling between multiple permanent abodes

Some taxpayers own multiple homes in different states and travel back and forth between them. Retirees, snowbirds, consultants, professional athletes, or anyone who moves between permanent places of abode in two or more states should know that their chances for residency audited are higher - especially if they’ve previously been flagged.


This is where residency comes into play. In the first example, the first hurdle to clear is changing domicile, which, for high-net-worth or high-income people, will almost certainly trigger an audit. Once that audit is completed -- and hopefully won! -- the taxpayer then needs to be concerned about residency and non-residency audits, which can occur repeatedly and at any point after changing domicile. 

Let’s use the example of a snowbird couple who changed their domicile from New York to Florida but still own a home in New York to which they frequently travel. They would need to be careful about how many days they spend in New York. If they go over 183 days, New York will consider them New York residents and will tax their income. New York may decide to audit them even if they don’t go over 183 days. As previously discussed, the taxpayer is guilty until proven innocent and must prove that they spent less than 183 days in New York. The snowbird couple must always be counting days, tracking their travels and collecting data points in case they get audited. It’s much easier to start doing this as soon as possible -- and to automate and digitize this activity -- versus waiting to be audited.

3. Moving shortly before selling a business

Taxpayers who move and then sell their business shortly after will raise a red flag, especially if they move from a high-tax state to a low- or no-tax state. The state which they left, which stands to lose out on the taxes of the sale of their business, will almost certainly audit them and ask them to prove that their move was legitimate.


One thing auditors will look for in this scenario is whether the owner is still showing involvement in the business. For example, maintaining consistent communication with new management long after the sale will be perceived as still being involved in the business. Auditors will also look to see if the owner continues to travel to and from the state in which the business was sold. Again, this highlights the importance of keeping accurate travel and location records, and having reliable data that can be used as proof in an audit.


In line with the trend of people moving to more tax-friendly states, there is also a trend of business owners relocating their businesses where property and income tax rates are low. This can also be tricky. Filing for a change of address will draw the attention of tax authorities and will (with high certainty) trigger state auditors to pursue an investigation to verify that business operations have actually changed.


It is also important to note that the actions of the executives of a business could put the organization at risk. Red flags raised by executives, especially if they are in association with the business as discussed above, will likely draw attention to the organization. This should be considered if the business is a partnership or larger business involving more people. A tax attorney or other expert who specializes in moving businesses from one state to another should be consulted prior to moving.

4. Moving shortly before selling a large amount of stock or other asset that results in a capital gain

Similar to the previous example of selling a business, it is not uncommon for people to move to a low- or no-tax state before selling a large amount of stock or other asset that results in a taxable capital gain. This will create a red flag and, for high-net-worth individuals, will likely trigger an audit. Say, for example, that your client bought stock while residing in New York State and then sells that stock while claiming to live in Florida. New York State will most likely come after the taxpayer in a quest to tax the capital gain on the asset.


As with the other risk factors discussed, the best way to minimize risk is to establish proof and legitimacy around the move. The taxpayer needs to show that they are not trying to cheat the system. It is recommended that they create a digital record of their location data leading up to the financial event, through the financial event and well after the event. Proof is the only thing that wins audits, and reliable data provides that proof.


Although tax season is behind us, your clients should know that the chance of being pursued at the state level for a residency audit is still likely at any time during the year. Knowing the high-risk factors discussed in this article and also in this highly detailed guide will make your clients more informed and better-prepared for domicile, residency and non-residency audits.


Auditors have many tools at their disposal to make their case. Many taxpayers are ill-equipped to fight these audits because they use paper-based or dated and flimsy forms of evidence. More importantly, they do not proactively collect evidence leading up to and through the financial and life events described above. This leaves them flat-footed and playing catch-up during the audit.

Today, there are ways to automate and digitize a taxpayer’s record of location and residency. This digital record can then be used as verifiable proof in an audit. Tax advisors are well-positioned to see the risk factors, warn their clients, and help them be prepared for potential audits.




IRS needs to make fraud referrals easier

By Daniel Hood


The Internal Revenue Service’s processes for handling fraud referrals from the public need serious work, according to a new report.


The new report, from the Treasury Inspector General for Tax Administration, found that the way the IRS handles its Information Referral program and the Forms 3949-A, “Information Referral,” that individuals and businesses use to report potential tax fraud, needs serious improvement.

While almost $247 million in taxes were assessed based on these fraud referrals in Fiscal Years 2016-2018, the number of referrals actually dropped by almost 15 percent over the same period, from over 72,000 a year to just under 62,000.


Among the problems cited in the report was the fact that the IRS still lacks an online referral application – an improvement TIGTA suggested six years ago.

The IRS also needs to make it easier for taxpayers to learn how to report suspected fraud: The inspector general’s audit noted, for example, that a basic keyword search on does not call up the ““How Do You Report Suspected Tax Fraud Activity?” page.


In addition, the IRS does not accurately account for or track information referrals. A TIGTA review of four different weeks’ inventory reports on Forms 3949-A received found “significant discrepancies” in reporting, and a review of a sample of forms that were marked for destruction found that almost three-quarters of them should have been reviewed more carefully.


Among other things, the inspector general recommended that the IRS give staff better guidelines and make sure they’re followed, build strong procedures around handling fraud referrals in languages other than English, and better track misrouted referrals.


The IRS agreed to all of the recommendations, and plans to improve its procedures.




Uber examined by IRS for tax charges

By Giles Turner


Uber Technologies Inc. is being examined by U.S. tax authorities and said that its potential tax charges in a number of key markets could change.


The recently listed ride-hailing company said in its S-1 disclosure in April, and repeated in its 10-Q filing Tuesday, that the IRS is examining the tax years for 2013 and 2014. Uber also added that it is under examination by other state and foreign tax authorities, and that its tax benefits are to be cut due to the company’s "transfer pricing positions."


Uber gained 2.6 percent at 9:34 a.m. in New York Tuesday as broader stock indexes recovered from the previous day’s sell-off. The stock was down 8.3 percent from the IPO price of $45 through Monday’s close in New York.


Transfer pricing concerns the transactions of goods and services among corporate subsidiaries, and has sometimes been seen as ways to shift income to low-tax jurisdictions. In 2017 European authorities fined Inc. $294 million for booking profits in a tax-free unit located in Luxembourg that was meant to license the technology behind its web shopping platform.


While Uber said it believes it has adequate amounts that have been reserved in the relevant jurisdictions, tax years from 2010 to 2019 could be adjusted in a number of its key markets, including the U.S., U.K., the Netherlands, and India.


A spokeswoman for the company didn’t immediately respond to a request for comment.

Uber announced its first quarterly results as a public company last week, posting first-quarter sales near the high end of its previously disclosed preliminary results. The company also reported a $1.01 billion quarterly loss, among the largest of any public company.


Uber’s first quarter gross unrecognized tax benefits rose by $1.3 billion. In Tuesday’s filings, it said it expects the gross amount of unrecognized tax benefits to be reduced by at least $141 million over the next year.


Uber’s reveal of its IRS investigation arrived the same morning analysts at the ride-sharing company’s banks began research coverage of the San Francisco-based company with buy ratings.




10 tax tips for college grads

Most college majors don’t get students ready for handling taxes – and as they start new jobs, face a rapidly changing economy, and bear up under massive amounts of student loan debt, today’s college graduates can’t afford to ignore the perils, pitfalls and opportunities of the Tax Code.

“College may have prepared you for your profession, but it may not have prepared you for tax proficiency,” said Mark Luscombe, JD, LLM, CPA, and principal federal tax analyst for Wolters Kluwer Tax & Accounting (as well as a columnist for Accounting Today). “Unless your specialty happened to be tax, getting a tax expert on your team early can help guide you through many tax-related decisions as you move from the halls of ivy to the halls of business.”

With that in mind, Luscombe and Wolters Kluwer have compiled a list of top tax issues that college graduates should pay attention to.


1. Coordinating with their parents

Their parents may have been claiming them as dependents, which will probably need to change once they enter the workforce.


2. Student loan interest

The tax breaks for tuition, fees and other college expenses they or their parents may have been getting while they were in school can continue for interest paid on outstanding student loans after graduation, but the rules are a little complicated, and consulting a tax professional is a good idea.


3. Continuing their education while starting work

Work-related continuing education is no longer deductible as a miscellaneous itemized deduction, but it may still qualify for exclusion from income if it’s part of an employer-provided educational assistance program. The Lifetime Learning Credit may also be available for graduate school or other post-college training.


4. Retirement accounts

They should start contributing as much as possible to retirement accounts, from 401(k) plans offered by employers, or IRA or Roth IRA accounts.


5. Health insurance

In addition to an exclusion for employer-provided health insurance, there are also tax-advantaged health savings accounts and flexible spending accounts to consider.


6. Graduation gifts

Gifts are not taxable to the recipient, and, unless very large, may not be taxable to the giver either.


7. Side gigs

Students often have had some experience working side gigs while in school, either as an employee or on their own. They should keep good records of business-related expenses, which can be deducted if they are self-employed. Self-employed graduates may also face the shock of having to pay estimated taxes and self-employment taxes.


8. No more moving expenses

Prior to 2018, the expenses of moving to a new job could qualify for a tax deduction. However, as a result of the Tax Cuts and Jobs Act, those expenses are no longer deductible except for members of the armed forces.


9. Part-year withholding

Starting a job mid-year can result in over-withholding based on the assumption that the employee earned the same amount for the entire year. Newly employed grads should check with their employer to see if part-year withholding is available.


10. Record-keeping

Grads should keep a file of tax-related documents, such as expense receipts and tax statements, so that they are ready for their tax professional when tax time rolls around.




Evangelist’s generous tips and gifts not deductible

By Roger Russell


The Tax Court has held that the generous tips and gifts that a Catholic evangelist considered to be part of his efforts to spread the gospel were not deductible charitable contributions.


Robert Oliveri, who served in the U.S. Air Force for more than 26 years, frequently attended church-related meetings, participated in community-outreach efforts, and assisted various church officials. He retired from the Air Force in 1986, and the following year he took a 16-week Catholic evangelization trainers program offered by Franciscan University of Steubenville, a Catholic university in Ohio.


Since that time he dedicated his life to being an evangelist, seeking to spread the teachings of the Catholic Church through random interactions with members of the general public. He considered all of his contact with members of the public to be opportunities for evangelism.


He co-founded Brothers and Sisters of the Divine Mercy (BSDM), a 501(c)(3) organization, in 1987. On his 2012 tax return, he listed as charitable deductions to the organization nearly $40,000, including a wide variety of expenses These included extremely generous tips to waiters, gifts to individuals, plane rentals, and cable service for TV and internet.


In denying the deductions, the Tax Court noted that Oviveri’s activities were not coordinated with the Catholic Church or BSDM to treat the expenses as “to or for the use of” either organization. Some of the expenses, such as a newspaper subscription, were nondeductible personal expenses. A number were over $250 and no contemporaneous written acknowledgment was provided, as required by Reg. section 1.170A-13(f)(10).


Oliveri contended that the Service’s three audits of his federal tax returns over a 10-year period resulted in “excessive Government entanglement with his exercise of religion.”


“We disagree. We do not look behind a notice of deficiency to examine the Commissioner’s motives or the administrative policy or procedure involved in making the determination without credible evidence of unconstitutional conduct by the Commissioner,” the court stated. “[Oliveri] has not provided a basis for us to conclude that the Commissioner unconstitutionally discriminated against his religious beliefs.”




Airbnb hosts beware: Tax issues loom

By Roger Russell


With the summer season underway, some homeowners may be thinking of listing their homes on Airbnb or other short-term rental platforms to bring in a few extra dollars. Before they do so, they should be aware of the issues involved, according to Barbara Weltman, author of “J.K. Lasser’s Small Business Taxes 2019.”


“They should check local zoning laws and homeowner association rules, and they should check on whether there is any local occupancy tax to be paid,” she said. “For example, a Massachusetts excise tax of 5.7 percent — up to 6.5 percent in Boston — goes into effect on July 1, 2019.”

And then, there are a host of federal tax rules that need to be addressed.


“Short-term rental hosts must be concerned first and foremost with federal income taxes,” said Stephen Fishman, author of “Nolo’s Every Airbnb Host’s Tax Guide.” “If taxpayers rent their property for 14 days or less during the year, they may not have to pay any income tax at all on their rental income. However, if they rent their property more than 14 days during the year, they have to pay federal income tax on the net rental income they receive during the year. When they file their tax return, they add their net rental income to their other income for the year, and pay income tax on the total. The net rental income is the total rental income minus the deductible rental expenses.”


“In theory, since rental income from annual rentals of 14 days or less is tax-free, the taxpayer doesn’t have to list it as income on their tax return,” Fishman observed. “The instructions for Schedule E expressly provide for this. However, as a practical matter, if Airbnb or another rental platform the taxpayer uses reports the rental income to the IRS on a Form 1099-K or 1099-MISC, the taxpayer could have issues with the IRS due to computer matching. If the income shown on these forms doesn’t match the income reported on the taxpayer’s 1040, the IRS may question the taxpayer, most likely through correspondence.”


Although Airbnb and other rental platforms generally will not report rental income of 14 days or less during the year to the IRS, if taxpayers do receive a 1099 they should take steps to avoid being questioned by the IRS, Fishman indicated: “The IRS hasn’t provided any guidance on this, but one approach is to file Schedule E and list the rental income on Line 3 as ‘Rents received,’” he suggested. “Then, on Line 19 — ‘Other’ — list the income as an expense and add the following note on the space provided in Line 19: ‘Rent on Line 3 is exempt from tax under Section 280A(g) — residence rented less than 15 days.’ Then list ‘Zero’ on Line 26, ‘Total rental real estate and royalty income or loss.’ This should [satisfy] IRS computers since the income shown on the 1099 will be listed on your return.”


The portion of current-year state and local property taxes attributable to rental income may be deducted as an operating expense, and it doesn’t count toward the $10,000 SALT cap of the Tax Cuts and Jobs Act, Fishman noted. “Thus, if taxpayers itemize their deductions, engaging in short-term rental activities could help them deduct more property tax,” he said.


“The most important issue for most hosts is to keep track of all their expenses,” Fishman emphasized. “These include the listing fee, cleaning fee, and things you buy, like shampoo, candy, etc. Also, anything you buy for repairs, and depreciation allocated to how much and how often the property is rented,” he said.


“Airbnb and other platforms collect the rental fees from the guests, and pay the relevant local taxes to the appropriate agency,” he said. “But there’s no uniformity, so the taxpayer needs to find out what the local taxes are and ensure they are paid. Of course, if taxpayers don’t use a platform but list the rentals independently through Craig’s list, they are responsible.”




Trump’s tariffs have already wiped out tax bill savings for average Americans

By Laura Davison


President Donald Trump’s trade wars have already wiped out all but $100 of the average American household’s windfall from Trump’s 2017 tax law. And that’s just the beginning.


That last $100 in tax-cut gains also could soon disappear — and then some — because of additional tariffs Trump has announced or is considering. If the president makes good on his threats to impose levies on virtually all imports from China and Mexico, those middle-earning households could pay nearly $4,000 more as they shell out more for a vast range of goods — from avocados to iPhones.


Subtract the tax cut, and the average household will effectively be paying about $3,000 more a year in additional costs.


“It’s giving with one hand and taking with the other,” said Kim Clausing, an economics professor at Reed College in Portland, Oregon, who’s written a book promoting free trade.


Here’s how the math works: middle earners got an average tax cut of $930 for tax overhaul passed in late 2017, according to the Urban-Brookings Tax Policy Center. The tariffs already in effect cost the average household about $831, according to research from the New York Federal Reserve.


China Goods

Add in the additional tariffs on another $300 billion in Chinese goods that Trump proposed in May, and is still considering, and that increases the cost for an average family of four to about $2,294 annually, according to research from “Tariffs Hurt the Heartland,” a coalition of business groups.


Trump has also threatened to levy tariffs on all imports from Mexico, starting with a 5 percent tax beginning as soon as Monday that would increase monthly to 25 percent in October unless Mexico curbs illegal migration to the president’s satisfaction.


If the tariffs reach their highest level, the annual cost to households would increase by $1,700, according to Gary Hufbauer, a senior fellow at the centrist Peterson Institute for International Economics.


The full force of the Chinese and Mexican tariffs and subsequent retaliation would mean that consumers are facing an additional $3,994 in costs because of tariffs, more than four times the $930 tax cut for middle earners that the Republican Party touts as its signature legislative achievement under Trump.


These comparisons attempt to measure the direct benefit to households of the tax cuts — including larger paychecks — with the direct and indirect effects of tariffs, including lost jobs, higher prices, and retaliatory tariffs from trading partners.


The tariffs are “clearly demolishing” the benefits of the tax cuts for both businesses and consumers, said Daniel Ikenson, who directs trade policy at the libertarian Cato Institute. “Many households and consumers have been spared so far, but the next round of tariffs will be more problematic.”


In the beginning of the trade dispute, Trump and his advisers sought to put tariffs on products that consumers don’t directly buy, such as steel and aluminum. But as the trade feud with China has escalated, they ran out of non-consumer goods on which to put levies. The most recent round of announced tariffs includes consumer products, such as apparel, sporting goods and kitchen ware.


Trump’s most recent threat on all imports from Mexico would increase prices on cars and auto parts, televisions, phones and air conditioners, as well as produce including avocados, citrus fruits and pineapples.


Only the top 5 percent of earners would continue to see a net tax cut of more than 1 percent, according to the right-leaning Tax Foundation. Tariffs would also depress wages by about 0.5 percent and result in the loss of nearly 610,000 full-time jobs, according to the foundation.


That creates political problems for Republicans in Congress who’ve continued to back Trump even as they disagreed with his trade policies. Republicans have cited the passage of the tax-cut law, low unemployment rates and wage increases as signs that Trump’s policies have buoyed the economy. But there are signs that support is beginning to fracture.


The tax cuts “vaulted America back into the most competitive economy,” said Representative Kevin Brady, the Texas Republican who led the passage of the tax cut legislation in the House. “Higher tariffs and the uncertainty that comes with trade disputes" hurt the economy, he said.


Senate Majority Leader Mitch McConnell urged the administration this week to delay imposing the tariffs on Mexico until Republicans in Congress could plead their case to Trump. Most Senate Republicans have objected to Trump using tariffs to force tougher border enforcement by Mexico. Lawmakers are weighing moves to block the levies.


“This is a man-made disaster, because Donald Trump is not focused in any way on advancing a well-thought-out doctrine,” said Representative Hakeem Jeffries, a top Democrat from New York. “He seems to be carrying out at times personal vendettas, at other times political objectives and sometimes an effort to distract from the news of the day.”


Little Noticed

The effects of tariffs have yet to become noticeable to average consumers. That could soon change. The tariffs on goods from Mexico are slated to go into effect Monday, barring a last-minute deal between Mexican and U.S. negotiators. The Chinese tariffs targeting consumer goods could go into effect in the coming months.


U.S. and Mexican negotiators planned a third day of talks on Friday to try to reach an agreement that would avert the tariffs. Mexico is pushing for more time, but Vice President Mike Pence and other officials said the U.S. plans to impose tariffs on Monday.


“It’s not like all of sudden prices will jump 25 percent, but they could increase 10 percent or 11 percent,” said Brian Yarbrough, a senior equity analyst at Edward Jones, said of tariffs of 25 percent or more. “At some point, price increases will choke off demand, resulting in fewer sales.”


Republicans are hoping to campaign in 2020 on the message of a strong economy buoyed by their tax reductions and deregulation, which began two years ago. But the fresh sting of tariffs risk erasing any economic goodwill those policies generated.


“For the average household it will be a net loss, no doubt,” the Peterson Institutes’s Hufbauer said. “It will be painful.”




Tax pros report ‘record-setting’ number of extensions

By Jeff Stimpson


Some clients have always needed more time to get in returns, but this tax season saw an avalanche of extension requests. And while the Tax Cuts and Jobs Act played a major role, it wasn’t the only factor driving more and more clients beyond April 15.


CBIZ MHM experienced a much heavier load of extensions this year, due primarily to the complexities of reform, according to Bill Smith, Bethesda, Maryland-based managing director for the Top 100 Firm’s National Tax Office. “As many more pass-through entities had to extend, that had a ripple effect on 1040s, because individuals were not receiving K-1s by April 15,” he said.


CBIZ saw 7 percent fewer returns filed as of April 15 this year versus the prior year, and 13 percent more extensions filed, according to Smith.


“Heavier than it was last year,” said Helen O’Planick, an Enrolled Agent at HELJAN Associates in Manchester, Pennsylvania. “With tax law changes, it was just not easy to get some of the more difficult returns done in a timely fashion. And the clients didn’t seem to mind that at all.”


“Record-setting,” said John Dundon, an EA at Taxpayer Advocacy Services in Englewood, Colorado. “This cowboy won’t be roping and riding on any summer vacations this year.”


“Double the extensions we typically have,” said Debra James, an EA at Genesis Accounting & Management Services, in Lorain, Ohio. “All season we found folks procrastinating and experienced a mad rush at the end, more so than usual. I think the media painted a grim picture of what refunds and balances due would look like, and people were anxious about getting the returns done, and buried their heads in the sand for as long as they were able.”


“Many more extensions than normal,” reported Chris Hardy, an EA and managing director at Georgia-based Paramount Tax and Accounting. “Many of the early filers were extremely late this year. Not sure if this was due to the government shutdown in January or if it was just people in general.”

Other issues

Overall this year, the IRS expected to receive about 14.6 million extension requests from taxpayers, many of them in the final days of filing season. Just hours before this year’s deadline the IRS warned that 50 million taxpayers had yet to file their returns. About 153 million individual tax returns for the 2018 tax year were expected to be filed during 2019, millions right before the deadline.


By filing’s end, the IRS later said, the overall number of returns received and processed by the IRS remained roughly even with numbers from 2018.

The IRS even greenlighted seven extra days for 990, 1120 and 1065 filings affected by the outage of Wolters Kluwer’s CCH software.


Not all preparers reported a backlog. “This year I had 62 extensions, last year I had 58, so not much change,” said EA Terri Ryman of Southwest Tax & Accounting in Elkhart, Kansas. “Mainly got behind because I was the bottleneck. Returns were ready but I couldn’t get them all reviewed in time.”


Aside from extensions, tax time also continues for many with communication – usually perceived as threatening – from tax authorities, according to the blog IRS Mind.


Blogger Jim Buttonow reports that an IRS survey found that 41 percent of taxpayers need help outside filing season: 10 percent get a notice, audit or other action initiated by the IRS, and 31 percent need information or assistance with their tax situation.


More than three out of five taxpayers also cite “fear of an audit” as a factor influencing compliance, and most taxpayers equate almost any IRS notice to an audit.




What taxpayers really think

By Jim Buttonow


For the last two years, the Internal Revenue Service has surveyed taxpayers to find out what makes them comply with their tax obligations. The study – called the “Comprehensive Taxpayer Attitude Survey” is released with the annual IRS Data Book, a compendium of data related to tax filings and IRS enforcement and service activity. Prior to 2017, the last survey and study of taxpayer’s attitudes was from the IRS Oversight Board in 2014.

The Attitude Survey offers some interesting understandings on how taxpayers view the IRS and fellow taxpayers. It provides many findings about taxpayer needs and preferences – and what taxpayers value. Tax professionals can use this information to gain knowledge about what clients want and how they like to be served.

Here are seven insights from the survey.

1. Our voluntary tax system is still intact

Taxpayers want to do the right thing. This is good news for the US Treasury. The Survey showed that 85 percent of all taxpayers think it is not acceptable at all to cheat on their taxes. This number is fairly close to the voluntary compliance rate (VCR) of 81.7 percent in the last IRS tax gap study. The VCR measures how much of the nation’s taxes are paid voluntarily by taxpayers. Now 81.7 percent may seem low — but is higher than most countries in the world with a voluntary tax system (refer to the Greek and Russian economies with large portions of their economies outside the taxing system).

An interesting finding in the survey was that only 50 percent of Americans mostly or completely agree that it was their responsibility to report tax cheaters. Taxpayers with lower incomes also felt more strongly about making sure taxpayers paid their “fair amount” of taxes. Taxpayers felt strongly that the IRS should pursue corporations and high-income taxpayers to pay their taxes.

Tax pros — our clients are motivated to get it right. They feel obligated to do the right thing – and that means that they will need your help and assurance that they are in good standing with the IRS.

2. Taxpayers are generally OK with the IRS

Trust in the IRS is up over the past 5 years – 71 percent of all taxpayers polled say they trust the IRS to fairly enforce the laws. (Note: The chart above reflects phone respondents only for 2014-2016, and phone and online respondents for 2017 and 2018; the percent of phone-only respondents who trust the IRS is even higher for 2018, at 73 percent.)

Also, more Americans thought that the IRS had a good balance of customer service versus enforcement and 58 percent of all taxpayers thought the IRS should get more funding from Congress to enforce the tax laws. Last year, only 56 percent of taxpayers believed the IRS needed more money. Taxpayers mostly want the extra funding to go to provide more phone and personal assistance to taxpayers.

Taxpayers generally trust the IRS to protect their tax account records from cyber criminals. Seventy-two percent of all those polled stated are confident in the IRS’s cyber protections.

Tax pros need not worry that the IRS will be replacing them — see No. 5 below. The person that they value the most is not the IRS — it is their tax professional.

3. Most people feel compelled to pay taxes — but they know there is a ‘stick’ if they don’t

Consistent with the findings that most taxpayers do not like tax cheats, personal integrity is still the No. 1 reason for voluntary compliance — 93 percent of taxpayers state they are influenced to pay (somewhat or a great deal of influence) by their personal integrity. That is good news for the IRS whose audit rate is at a dismal 0.5 percent.

However, taxpayers still think big brother is watching them — through information statements like W-2s and 1099s. IRS compliance enforcement and audits are still a mystery to most — and there is real fear of an audit that drives taxpayer compliance. 

Tax pros are expected to make sure that the return is accurate, and it matches the IRS third-party information statements (W-2s, 1099s). If a discrepancy exists, taxpayer “fear” is real – and tax pros should be prepared to help.

4. Taxpayers prefer not to visit the IRS

Many taxpayers would rather get a root canal than interact with the IRS. When interacting with the service is necessary, taxpayers prefer to deal with the IRS online or by phone. Much of this preference may also have to do with shifting customer service delivery expectations to internet-based service options. Dealing with your taxes is likely not an exception to this trend. Taxpayers over 65 still like to deal with the IRS by phone. Everyone else prefers more web solutions.

What everyone agrees on is that waiting more than 5 minutes to get ahold of the IRS is not acceptable. The IRS is sure to feel the pressure to accelerate its digital service solutions to create phone capacity and to meet modern service preferences. The IRS is currently undergoing a six-year initiative to modernize IRS systems and customer service platforms. The survey shows that taxpayers are already screaming for these solutions.

Tax pros- multi-channel customer service is critical. Your clients want you to be responsive. Likely communicating with younger clients via email and your website is preferred. However, older clients still expect you to pick up the phone and not to leave them waiting on hold.

5. Tax professionals are valuable resources – and the IRS should be able to regulate them

This is not a light-bulb moment. Taxpayers still prefer an advocate — their tax pro — when they need answers and advice. But taxpayers also see value in the content on the IRS website.

The survey also shows taxpayers value an independent interpretation of the tax law and how it impacts them. Reference materials from non-IRS sources are the preferred choice for taxpayers to get information about their taxes. 

But taxpayers want comfort that their tax pro is doing a good job. Over 90 percent of all taxpayers believe it is somewhat or very important that tax preparers meet competency and ethical standards to practice. This statistic has long been the IRS’s fuel for tax preparer regulation.

For tax pros, your visible credentials are important here. Taxpayers like accountability. Your website and communications with your clients should be informative and display your expertise.

6. The older you are, the more you need a tax pro

Again, not a revelation here. Taxes get more complicated as you get older – and as a result, the need for a tax pro increases. Also, younger taxpayers are more comfortable with technology to prepare their taxes. While 51 percent of all taxpayers use a paid preparer, paid preparer use drops to 32 percent for those aged 18-24. Those 65 and older still use a tax pro 61 percent of the time to get their taxes done.

Younger taxpayers tend to self-file more. But as life gets more complex, taxes get more complicated. Tax pros need to be in a position to offer advice to new clients on changing life events that trigger the younger self-filer to engage with a tax pro. Many tax firms’ websites greet these new clients with information about how the firm can help with new life events, such as starting a business.

7. 41% of taxpayers still must deal with the IRS outside of filing a tax return

This data point is always my favorite and it shows that taxes do not end for many individual taxpayers after April 15. In 2014, the IRS Oversight Board’s survey showed 43 percent had to deal with the IRS after April 15. Today, that number has not changed much — 41 percent of taxpayers must deal with the IRS after filing. Ten percent of taxpayers are contacted by the IRS, mainly through an IRS notice or letter. The other 31 percent contacted the IRS, mostly by interacting with their website or calling them by phone (only 2 percent sent an email, and the same percentage accessed IRS information through social media). Whether they needed help with a notice, a tax issue like an audit, a penalty, their tax account information, return status, or other information, the fact is: 2 out of 5 taxpayers need help beyond April 15.

What does this mean? For 41 percent of taxpayers, taxes don’t end at filing. 

Out of the over 150 million individual taxpayers, there are millions with a tax issue, problem or notice. Some examples: 27 million taxpayers each year have a penalty; over 15 million taxpayers owe the IRS back taxes; 3 million taxpayers received a CP2000 underreporter matching notice in 2018; almost 1 million got audited in 2018. The list goes on … . 

One other data point: 79 percent of the taxpayers who interact with the IRS outside of filing a return are satisfied with their service. Tax pros — you can do better than 79 percent and be in a position to advocate for your client.


The 2018 Attitude Survey provides tax professionals a few clear takeaways. As taxes get more complex, the more the tax pro is needed. Taxpayers want to “get it right” and tax pros are clearly a valued resource for tax compliance and advice.

Younger taxpayers are making more demands of their service providers. The generational shift toward technology is upon us – and clients want the quick, responsive answers for their taxes that they commonly get with other financial products and services. 

Lastly, taxpayers are good people and they want to remain in good standing with the IRS. They want to comply but often fear the IRS should they need to contact them. Tax professionals need to be there year-round for the 2 out of 5 clients who must interact with the IRS outside of a tax return. The equation: Client retention is being there when you client needs you.

Tax pros, the future of your business looks bright. Despite all the talk about simplification, the modern tax pro is still the preferred choice for many taxpayers.




Preparers hopeful but wary of new efforts to regulate prep

By Jeff Stimpson


Tax professionals hate the crooks in their profession and want them regulated and weeded out. The question is, how? And how effective will the latest attempts by politicos be?


Sen. Ron Wyden, D-Oregon, and Ben Cardin, D-Maryland, have introduced legislation to require minimum standards for paid preparers and to rescind the PTINs of incompetent and fraudulent practitioners.


“I’m in favor,” said Mary Kay Foss, a CPA in Walnut Creek, California. “It’s offensive when you’re a professional trying your best to do the most complete and accurate job possible and you hear of someone doing a crummy job and giving the others a bad name.”


Debra L. James, an Enrolled Agent at Genesis Accounting & Management Services in Lorain, Ohio, said, “I cannot think of one logical reason why any ethical and law-abiding practitioner would oppose this. I’m disgusted by some of the unethical things I see unregulated preparers do, and how easily they convince taxpayers that what they do is right,” she said.


“Anything to get rid of the bottom dwellers in the preparation industry,” said Chris Hardy, an EA and managing director at Georgia-based Paramount Tax and Accounting. “I’m not one for more regulation, but there is so much scam in this industry that we need more regulation.”

‘Long overdue’

The Taxpayer Protection and Preparer Proficiency Act of 2019 would give the Treasury and the Internal Revenue Service the authority to set federal standards of tax practice for all paid preparers. It would also require certain preparers to meet minimum competency requirements, including obtaining a PTIN, satisfying examination and annual continuing education requirements and completing a background check.


“It’s imperative that preparers and tax professionals are licensed,” said Helen O’Planick, an EA at HELJAN Associates in Manchester, Pennsylvania. “We see too much bad stuff out there, and it’s not only hurting our profession, it’s hurting the taxpayer.”


“Long overdue,” said John Dundon, an EA at Taxpayer Advocacy Services in Englewood, Colorado. “Surprised it’s not a bipartisan effort. Lobbyists for the big-box chains will undoubtedly get it watered down to the point that it becomes marginally effective.”


“Excellent idea that should’ve been implemented years and years ago,” said EA Terri Ryman of Southwest Tax & Accounting in Elkhart, Kansas. “Seeing as this is the major source of income for the United States to operate, I would hope that we’d have competent folks preparing returns.”

CPAs, EAs and tax attorneys have long been subject to competency and continuing education requirements, but much of the tax prep industry has been unregulated except in a few states. The IRS launched its Registered Tax Return Preparer program nine years ago that imposed similar requirements on preparers. Following a lawsuit from a group of independent preparers, a federal court judge ruled in favor of the preparers in 2013, invalidating the RTRP program and saying it exceeded the IRS’s statutory authority.

‘Better than nothing’

“The only concern I have is the regulations discerning between errors and intent to commit fraud,” James said. “Making a mistake does not constitute a crime, and penalties imposed on otherwise ethical practitioners only serves to make us afraid to do our jobs for fear of making a mistake.”


“Good idea in theory, but may be difficult to implement,” added Bill Smith, Bethesda, Maryland-based managing director for the National Tax Office of Top 100 Firm CBIZ MHM. “Many preparers are either attorneys, CPAs … or Enrolled Agents, all of whom have their own testing and CPE requirements. So they’ll essentially be unaffected. The legislation seems to target the seasonal preparers who are more likely to bend or break the rules. The more you can get [seasonal] preparers to achieve established levels of education and avoid negligent or intentional wrong reporting positions, the better off the industry.”


“I don’t know that the ability to rescind PTINs will add much to the powers the IRS already has to censure, suspend, disbar or otherwise discipline under Circular 230, particularly if there has to be an initial determination that the preparer is ‘incompetent or disreputable,’” Smith said. “But this portion of the industry is so under-regulated that almost anything is better than nothing.”


Admittedly, Foss added, “It’s difficult to come up with standards that will not cause lots of criticism from all sides. CPAs will show that we’re a regulated industry with CPE standards for education and ethics so we should be exempted. Enrolled agents will have a similar argument for the reason they should be exempt. California registers tax preparers that do not have an EA or CPA credential, and based on that achievement, they’ll expect exemption. In some areas, attorneys prepare tax returns and will want an exemption as well. Some financial advisors prepare returns and comply with federal or state regulations. National chains of tax preparers have standards and training programs and will also argue that they deserve exemption.”


The other issue: increasingly complex tax laws. “In the past, some organization presented the same fact pattern to tax preparers in the categories mentioned and found that none of them got the exact same tax liability,” Foss said. “Even though none of them was clearly wrong, it’s both an art and a science to interpret the facts and the current laws.”




Federal agencies reducing incorrect 1099-MISC statements

By Michael Cohn


The accuracy of miscellaneous income statements submitted by federal agencies and other entities on the Form 1099-MISC has significantly improved, but better communication and outreach could further reduce the number of incorrect 1099-MISC statements filed each year, according to a new report.


The report, from the Treasury Inspector General for Tax Administration, noted that entities need to file a Form 1099-MISC information return statement for payments of $600 or more. Those payments can include nonemployee compensation, medical payments, rents, and proceeds paid to attorneys. In tax year 2015, federal entities reported more than $520 billion in miscellaneous income payments to the IRS on nearly 750,000 information return statements. The IRS reviews the accuracy of the Taxpayer Identification Number information contained on the 1099-MISC and when it identifies incorrect information, such as missing or incorrect payee TINs, it usually notifies the entity about any mismatches. TIGTA noted that accurate TINs are essential to the success of IRS programs that match tax information reported by payers against filed tax returns to determine whether payees have filed and reported the payments on their income tax returns.

According to IRS data, federal entities have significantly improved the accuracy of the payee TINs submitted on Forms 1099-MISC. Between tax years 2009 and 2016, the number of miscellaneous income statements submitted by federal entities with missing or incorrect payee TINs listed on error notices has fallen 80 percent.

1099-MISC error notices

The IRS has attributed those improvements to a TIN matching program from the federal government’s General Services Administration that matches federal payee information against IRS records at the time a company or individual registers to do business with the federal government.


According to the IRS’s own data, in tax year 2015, federal entities were notified by the IRS of more than 17,000 miscellaneous income statements with missing or incorrect TINs reporting more than $5 billion in payments. However, TIGTA found that few federal entities withheld federal income tax, despite being notified of their responsibility to do so. TIGTA estimates these federal entities could have potentially withheld nearly $400 million in backup withholding in tax year 2015 for missing and incorrect TINs if all the payments were reportable and not exempted from backup withholding provisions.


TIGTA talked about the notification process with five of the federal entities that received a notice from the IRS for missing or incorrect TINs submitted on their 2015 miscellaneous income statements. They expressed concern about some of the technological barriers to accessing the notice and accounting systems that weren’t capable of performing backup withholding, along with other concerns.


In its report, TIGTA recommended the IRS explore alternative notification processes and do more outreach activities so the with federal agencies understand their filing and withholding requirements. The IRS partially agreed with TIGTA’s recommendation that it conduct targeted outreach activities with federal entities, but disagreed with the other recommendation that it should explore alternative notification processes that enable payee lists provided with CP2100 error notices to be more easily accessed.


“IRS does not currently have a file sharing system to transmit files to federal agencies outside the current process of mailing an encrypted CD,” wrote Sunita B. Lough, commissioner of the IRS’s Tax Exempt and Government Entities Division, in response to the report. “We will pursue using such a system should one become available in the future.”

However, TIGTA said it continues to believe that the IRS should consider alternative forms of delivering the error notices.




Congress may kill some hated special-interest tax breaks for good this year

By Joe Light


If liberal and conservative advocacy groups can agree on anything, it’s this: A suite of more than three dozen or so corporate tax breaks that have expired over the past two years should stay dead.

Even so, there’s a bipartisan push among some lawmakers to renew them — even if that push will likely fail.


Congress has re-upped the temporary tax breaks in the past without much commotion, and many of the breaks still have wide support in both parties. But this time, fallout from the 2017 tax overhaul, reluctance in the House at more temporary breaks and a dwindling calendar of working days in Congress could lessen the enthusiasm for another renewal.


The breaks, collectively referred to as “extenders,” comprise a cornucopia of industry-specific provisions, often favored by lawmakers in districts they benefit. One would allow racehorse owners to depreciate the value of some horses more quickly. Another, that’s already been extended four times, gives a tax credit to coal producers, but only if the coal comes from Indian reservations. Others give tax breaks or credits for mine-safety equipment, companies in American Samoa and film projects in low-income areas.


One provision would extend a reduction in excise taxes that craft brewers and distillers pay when they sell barrels of spirits such as whiskey or gin. One problem: About 95 percent of the $4.2 billion in revenue lost from the perk actually goes to large companies, said Adam Looney, a senior fellow at the Brookings Institution who has researched the issue. Instead, many so-called craft whiskey producers actually purchase their whiskey from giant distillers and then slap their own labels on the bottled product, Looney said.


Margie A. S. Lehrman, chief executive officer of the American Craft Spirits Association, disputed Looney’s analysis and said that an extension of the tax break was an important goal for the trade association.


Critics of the breaks say that they’re an example of cronyism. Many target specific industries or companies without a strong policy rationale. Yet they also often get bipartisan support from lawmakers.


“It stinks to high heaven,” said Russell Latino, a vice president at the right-leaning Americans for Prosperity, on a call with reporters last month. “The only ones who are supportive of this are answering to those politically connected.”


As soon as next week, the House Ways and Means Committee could consider a package that would include extending the breaks through December 2020. The package could also include a 1 percentage point increase in the corporate tax rate to help pay for other Democratic priorities such as expanded tax credits for low-income households. Republicans, who control the Senate, are unlikely to support such a change, and Ways and Means Chairman Richard Neal, a Massachusetts Democrat, on Tuesday acknowledged the proposal may merely be an opening gambit for negotiations.


Last month, Senators Chuck Grassley and Ron Wyden, the senior Republican and Democrat on the tax-writing Senate Finance Committee, created five “task forces” to study what to do about 42 expired or expiring tax breaks that Congress has repeatedly resurrected, often long after they were allowed to lapse.


Americans for Prosperity, along with 11 other conservative and progressive groups, last month sent a joint letter to Grassley and Neal.


“Let what is dead remain dead,” the groups said in the letter. Wyden and Grassley introduced their working groups less than two weeks later.


Some lawmakers say a tax-extender bill is far from a fait accompli.


Representative Kevin Brady of Texas, the senior Republican on the House Ways and Means Committee, on Tuesday said he would not support another temporary extension for many tax breaks without other changes.


“The new tax code supersedes a number of them. Some have value, should be made permanent,” Brady said. “Others we think need to go.”


Brady and Grassley in a statement called the extenders’ proposal discussed by House Democrats on June 11 a “nonstarter,” arguing that Democrats were trying to use tax extenders as leverage in other tax-policy disagreements.


House Democrat Lloyd Doggett of Texas has proposed an extenders bill that would offset the cost by revoking the 2017 tax law’s expansion of the estate-tax exemption, a deal-breaker among Republicans. Some Democrats also want any bill to include an enhancement of the Earned Income Tax Credit, another provision that Republicans oppose.


The 2017 tax law razed the rationale for some extenders, or at least made them irrelevant for the taxpayers who previously used them.


Home buyers who make a down payment of less than 20 percent when getting a mortgage typically must pay premiums for private mortgage insurance to protect government agencies in case they default. A provision that made those premiums tax deductible expired at the end of 2017. The premium deduction was popular among low and moderate-income borrowers, who didn’t have as much money for a down payment.


However, because President Donald Trump’s tax law doubled the standard deduction, far fewer of those borrowers now itemize their taxes, reducing the perk’s relevance.


“The tax law obviously changed things. We are very aware of that,” said Lindsey Johnson, president of U.S. Mortgage Insurers, a trade group that’s pushing for an extension. Johnson said the group has had bipartisan support to extend the break and is talking with the Senate Finance working group to attempt to preserve it in a final bill.


— With assistance from Kaustuv Basu




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

By Laura Davison


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


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


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


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


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


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

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


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


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




Is VAT a villain?

By Roger Russell


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


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

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


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


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

Impact of trade policies on CPA executives' businesses

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


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

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


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


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


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




10 estate plan pitfalls to avoid



Do you remember when you last reviewed your estate plan? If the answer is when you first signed the stack of documents at your attorney’s office, then you’re not alone. Many of us complete an estate plan and then fail to revisit it for years (and some never do).


It is important, however, to review a plan every so often due to ever-changing tax laws and major life events, such as a birth, marriage, divorce, or death. At a minimum, you should consider dusting off and revisiting your estate plan every 3 to 5 years, to help ensure alignment with current laws.


Below is a list of 10 common pitfalls of an outdated estate plan. If any of these apply to you, it may be prudent to meet with your estate planning team to review and, perhaps, update your plan.


1. Fiduciary follies: When the wrong executor or trustee is named

Do you know who your fiduciaries are? A fiduciary is someone who is appointed to take legal control over assets for the benefit of another person (the beneficiary). It is a fiduciary's legal responsibility to act in the beneficiary's best interest. Two types of fiduciaries often seen in estate plans are executors and trustees.


Executors are typically appointed in a will and are given control of assets during the probate process, until the assets are ultimately distributed to the named beneficiaries. Executors are responsible for collecting all the assets of the deceased, paying final debts, paying expenses, and filing any estate tax returns.


Trustees control the assets held within trusts, which may have been set up during a person's life, or at death under the terms of a will. While an executor's role is typically for a finite period, a trustee's role may continue either in perpetuity or until the trust is terminated. A key role of the trustee is to make distributions to a beneficiary while following the terms of the trust agreement. Executors and trustees generally bear responsibility for investments, accountings, and tax filings during their tenure.


Outdated estate plans often name fiduciaries or successor fiduciaries that may no longer be suited for the position. A fiduciary named years earlier may be too elderly, or even deceased. If a professional (e.g., attorney, CPA) is named, it is possible that they may no longer be practicing, or their professional relationship with the beneficiary may have since ended. Even named corporations, which we generally assume to exist in perpetuity, may have merged with or been acquired by another entity. And children who may have been too young to serve when the documents were created could now be capable of taking on the role of fiduciary.


Although fiduciaries are bound by certain standards of law, it is most important to name individuals you trust. Other important considerations are the age, maturity, and level of financial knowledge of the fiduciary. It is quite possible that the individuals who had fit most of these qualifications may have changed over the years and now no longer do.


Check to see who you have named as fiduciaries in your estate planning documents to determine whether you need to revisit these designations.


2. Your "little ones" aren't so little anymore

When a child is young, a key estate planning decision parents often make is to determine a guardian. If your child is now an adult, however, a guardian may no longer be relevant, but new considerations arise: Is your child married? Is your child financially responsible? Are you leaving assets to your children in a trust? Have your children had children of their own?


Many trusts are designed to distribute assets to children at certain ages, e.g., one-third at age 25, one-half of the remaining assets at age 30, and the remaining balance at age 35. If a child is now above one or more of these ages, they will receive distribution of part or all of the trust assets outright and free of trust upon the last to die between you and your spouse. Now that your child is older, you may feel differently about their ability to handle a large inheritance; for example, you may feel that large sums might not be spent in the most prudent manner if they are free of restrictions. Further, if the child is married, an inheritance can easily be commingled with the spouse's assets, possibly subjecting the distributed trust assets to equitable distribution upon a divorce. An inheritance free of trust will also be subject to any existing or future creditor claims. These are some of the factors you may wish to consider when reviewing your estate plan to determine if it still meets your needs.


Furthermore, in many cases, outdated estate plans are simply not consistent with current wishes or circumstances. For example, it is possible that one child within a family has been financially successful while another has not. When an estate plan is initially created, an equal amount of inheritance among children may have been the goal, but that may have changed over time. Also, in some cases, beneficiaries named on retirement accounts and life insurance policies may not be in line with the trusts created for children under a will or revocable trust. It is vital to revisit all the ways assets are being left to children, given their current age and maturity, to make sure the plan still matches the current intent.


Lastly, when children are minors, they do not typically need health care powers of attorney, living wills, or advance health care directives, since their parents or guardians are legally responsible for them. But once they become adults, they should consider having these important documents in their own right.


Periodically review the ways that assets will be left to your children, and encourage them to have the appropriate estate planning documents in place as they get older and their circumstances change.


Read Viewpoints on 6 reasons you should consider a trust


3. Privacy please: HIPAA rights and when they should be waived

The Health Insurance Portability and Accountability Act (HIPAA) was passed in 1996, in part to establish national standards for protecting the confidentiality of every individual's medical records and other personal health information. As a general rule, health care powers of attorney, living wills, and advance health care directives should contain provisions waiving an individual’s HIPAA rights with respect to their health care representatives.


These stipulations allow physicians and other health care professionals to share a patient’s medical information with their representatives, empowering them to make informed health care decisions. Without these HIPAA authorizations in health care documents, doctors may be unwilling to share medical information, which may impede decision-making regarding a patient's care and any end-of-life wishes. These concerns would also apply to adult children who may have just graduated from high school or are attending college.


Take stock of your family's health care powers of attorney, living wills, and advanced health care directives, to ensure that health care representatives can make informed decisions regarding your family's care.


4. More money, more complexity: Wealth accumulation can create estate tax issues

Financial security is a goal for us all, but with wealth comes complexity. An increase in wealth not only typically causes an increase in annual income taxes, but it may also beget estate and gift taxes. Current federal law allows each citizen to transfer a certain amount of assets free of federal estate and gift taxes, named the "applicable exclusion amount."


In 2019, every citizen may, at death, transfer assets valued in the aggregate of $11.4 million ($22.8 million for married couples), free from federal estate tax. For gifts made during one's lifetime, the applicable exclusion amount is the same. Therefore, every person is allowed to transfer a total of $11.4 million during their life or at death, without any federal estate and gift tax. (This does not include the annual gift exclusion, which applies as long as each annual gift to each recipient is less than $15,000.)


Therefore, generally, only estates worth more than these amounts at the time of death will be subject to federal estate taxes. But this wasn't always so. From 2001 to 2009, the applicable exclusion rose steadily, from $675,000 to $3.5 million. 2010 was a unique year, in that there was no estate tax, but it was brought back in 2011 and then made permanent (unless there is further legislation) by the American Tax Relief Act of 2012 at an exclusion amount of $5 million, indexed for inflation. The Tax Cuts and Jobs Act passed in December of 2017 doubled the exclusion amount to $10 million, indexed for inflation ($11.4 million for 2019). However, the new exclusion amount is temporary and is scheduled to revert back to the previous exclusion levels in 2026.


Outdated estate documents may include planning that was appropriate for estates at much lower exemption values. Many documents have formulas that force a trust to be funded up to this applicable exclusion amount, which may now be too large or unnecessary altogether, given an individual’s or family’s asset level.


Take the time to review the formulas in your estate documents with your attorney and tax professional to determine whether the planning you have in place is still appropriate.


5. Getting out of Dodge: Changes in state residency

Where were you living when you drafted your most recent estate plan? Each state has its own estate and income tax laws, and it is important to plan appropriately. Furthermore, some states are common law property states and others are community property states. There are significant differences between them when it comes to transferring assets, and a document drafted in a common law property state might not be appropriate in a community property state.


As of 2019, 17 states and the District of Columbia* also impose some form of estate or inheritance tax. Additionally, each state has different exemption amounts, so it is vital to evaluate your current wealth and estate planning needs with your attorney, keeping both the federal and your state's exemption amounts in mind.


In addition, for many married couples in a state that imposes a state estate tax, this may have the effect of requiring payment of state estate tax after the first death, when none had been anticipated. Prior to 2001, because the "pick-up tax" was imposed only on estates that had to pay federal estate tax, estates below a certain threshold did not have to worry about such a tax. The threshold was the amount of the federal applicable exclusion amount. That is no longer the case. The practical effect of the difference between a state's exemption amount and the federal applicable exclusion amount is that certain estates will now be subject to a state estate tax, despite the fact that the estate is exempt from federal estate tax. In some situations, establishing a trust as part of an estate plan can help counter state estate tax implications.


Review your estate plan with your attorney and tax professional, with an eye toward reducing federal and state estate taxes, and make sure to reevaluate and potentially update your plan to establish residency in another state.


6. Potent portability: Unused portion of exclusion amount may now be transferred to second spouse

Portability rules allow a surviving spouse to take advantage of any unused portion of their spouse's applicable exclusion amount, provided that a federal estate tax return is filed to preserve the deceased spouse’s unused applicable exclusion amount within 9 months of their passing (15 months if an extension is granted).


Prior to portability, many estate plans included credit shelter trusts (CSTs). CSTs are sometimes referred to as bypass, family, or exemption trusts and are typically funded with assets having a value equal to the applicable exclusion amount ($11.4 million in 2019) of the first spouse to die. Assets placed in a CST can be excluded from the estate of the surviving spouse if the applicable exclusion amount of the first spouse to die is properly allocated to it. Prior to 2011, couples were required to use a CST to preserve the exclusion of the first spouse to die. With portability, this is no longer required. However, it should be noted that flexibility may be limited by the non-portability of the generation-skipping transfer (GST) tax exemption and at least some state estate tax exemptions, which still limit the time period in which the exclusion may be allowed. Although there may still be other reasons to use a CST, you might consider reviewing your estate planning documents with your attorney to determine whether allowing more flexibility in the funding of a CST, or the use of portability, is appropriate in your current situation.


As an alternative, for many people, disclaimer trust provisions allowing for this flexibility may be more suitable, considering the allowance of portability. Disclaimer trusts differ from CSTs in that they are optional, and are activated only after the first spouse's death at the election of the surviving spouse, depending on their current situation. There is flexibility in this type of planning because if there is no tax reason to use credit shelter planning, the spouse can simply receive all or a portion of the assets outright. This allows tax-planning flexibility without creating unnecessary complication. In addition, disclaimer trusts may be a good way to help reduce state estate taxes (if your state imposes one) and may help address uncertainty over the size of the marital estate, or concerns that the exclusion amount may decline in the future.


Although recent law allows the portability of the deceased spouse's applicable exclusion amount, there is no portability of the deceased spouse's generation-skipping tax exemption amount. A GST is the transfer of property, directly or in trust, to an individual who is 2 or more generations below the transferor. The IRS taxes these transfers at a rate of 40%. However, the IRS does give an exemption amount for the first $11.4 million (similar to the applicable federal exclusion amount). If you wish to use GST planning for your children so that your assets can benefit them during their lifetimes and then pass to your grandchildren without incurring estate tax at that time, you must preserve the GST exemption.


Given changes to portability, it makes sense to review your estate plan with your attorney and tax professional to ensure that it is still structured in the most efficient way.


7. Don't stop giving: Fulfilling philanthropic goals

For many, with success comes a desire to give back to the community or to causes they feel most passionate about. Individuals may contribute their time (volunteer work), talents (pro bono activities), or treasure (money or other assets). Many donate to religious organizations or to charities that support cancer research or that provide benefits to military veterans. Generally, people donate to charity because they care about these organizations, but they may also be seeking charitable deductions for income tax purposes. The bottom line is that philanthropy is positive for society, for the charity, and for donors' families.


Many of us, however, forget to include our important charitable causes in our estate plans, so our intentions are often not carried out after our deaths. Just like when we give to charity during our lives, there are many of the same benefits available when charitable giving is included in our wills. Everything from direct gifts to charities, to charitable trusts, to donor-advised funds, or to family foundations should be discussed and considered with your estate planning team. There are various ways to help you achieve your charitable goals while ultimately potentially reducing your estate taxes and increasing the amount you pass on to heirs.


Discuss your charitable intentions with your estate planning team to ensure that your philanthropic goals are included as part of your plan.


8. The lesser of 2 taxes: Income tax rates have increased relative to estate tax rates

Your prior estate planning may have emphasized federal estate tax savings because of the much lower applicable exclusion amount and traditionally higher federal estate tax rates. Changes in the federal tax law make it increasingly important to focus on the income tax consequences of estate planning in addition to the estate tax consequences. For estates still subject to federal estate tax, the federal estate tax rate is 40%. These rates must be compared with the top federal income tax rates of 37% on ordinary income and 20% on long-term capital gains and qualified dividends, plus a 3.8% Medicare net investment income tax.


Furthermore, trust income tax rates must be taken into consideration. Trusts are taxed at the highest federal income tax bracket at as low as $12,750 of income. Therefore, when transferring assets to a trust for estate planning purposes, consideration should be given to the potentially negative consequences of higher income taxes. Outdated estate plans may not provide the flexibility required to shift the income tax burden from the trust to individuals in potentially lower tax brackets.


Revisit your estate planning documents and gifting strategies with your attorney and tax professional to determine whether they are still appropriate, considering the Medicare net investment income tax, the current federal estate tax rate, and the increased applicable exclusion amount.


9. Make sure life insurance policies are not on life support

Does your existing life insurance policy still make sense, both from an estate planning and a financial planning perspective? Is the policy performing as expected? Is the policy still competitive with what is available in the marketplace today? Do you own your policy outright or should it be owned by a trust? Many people purchase life insurance and continue paying the premiums for many years, even though their financial picture has changed dramatically.


Carefully review and assess the health of your life insurance and its ownership during your periodic estate plan review to make sure it is consistent with your financial and estate planning goals.

Read Viewpoints on Can life insurance help your estate plan?


10. Help me help you: Talking with the next generation

Do your loved ones know what you plan to leave to them when you die? Do they know who to contact when something happens? Fewer surprises will make estate administration much easier when the time comes.


Consider drafting and regularly updating a letter of instruction to your children and fiduciaries. This letter should include an inventory of assets, and a list containing names, addresses, and phone numbers of your estate planning team. Easy access to this information may save your family from headaches down the road. Furthermore, having a discussion regarding your assets, your intentions, and your reasoning (especially when creating trusts rather than leaving assets outright) will help build relationships and avoid family discord, and may even reduce the likelihood of litigation down the road.


Additionally, make sure to give your fiduciaries the appropriate power to handle your assets. There has been a lot of change in recent years to laws regarding the administration of digital assets, such as email accounts, social media accounts, and song and picture libraries. You may want to create a list of your digital assets and name a successor to handle them. Proper documentation of succession planning for your digital assets is necessary because state and federal laws may prohibit others from accessing or using your digital assets without written consent.



Many estate plans no longer meet their original intent due to inattention and a lack of routine updating. Death, birth, marriage, divorce, and having children reach adulthood are some of the many reasons estate plans become outdated. Inevitable changes in laws and the tax code, not to mention changes to family and financial circumstances, further erode a plan’s effectiveness. Successful estate planning requires more than just having signed the initial documents: Your plan should evolve as your circumstances do.




It only takes three seconds

By Ranica Arrowsmith

On Monday, May 6, accountants around the United States woke up to start their workweek only to discover that their CCH products — a suite of tax and other solutions offered by Wolters Kluwer Tax & Accounting — were down. Confusion turned to panic, which then turned to anger pretty soon after customers were informed the company had been the victim of a cyberattack.


Social media forums began to light up with questions, discussion, conjecture and rumors. The few hours between the products going offline and the first set of communications the software provider sent its customers were enough to cause a frenzy, especially as the May 15 tax deadline for tax-exempt clients loomed around the corner. Wolters Kluwer’s communication was sparse, but over the next few days the company announced that the CCH product suite had been the subject of a malware attack, that the products had been taken offline to protect customer data as soon as the breach was discovered, and that they would remain offline until the situation was deemed safe.


Sure, CCH customers — not just in the U.S. but around the world — were mad. But Wolters Kluwer’s response was swift and what cybersecurity experts deem prudent.


Cybersecurity expert Wesley McGrew, director of cyber operations for Horne Cyber, said that it’s almost impossible to know how such a breach really starts. Releasing information only when it is known for certain is the best way for a company to respond, as opposed to making statements that it may have to edit and retract later.


“The investigation requires bringing in incident responders and security specialists to figure out how the [cybercriminals] got in in the first place,” he said. “Bringing the systems offline was done out of prudence — you can’t have people uploading files without knowing exactly what the situation is.”


“Every indication is that [Wolters Kluwer Tax & Accounting] is doing what they should be doing,” said McGrew, whose company is a subsidiary of Top 100 Firm Horne, which uses CCH products and was affected by the outage. “Responding and investigating, and they seem to be staging back online in a measured fashion, which is probably smart. The worst you can do is rush to get back online, still have an infection, and leak even more data.”


It took about 24 hours for the media, including Accounting Today, to pick up the CCH story, mainly because information was limited. But as soon as coverage began, the mood both among accountants engaging on social media and Accounting Today’s readers settled down to calmness. A week after the outage, Wolters Kluwer negotiated with the Internal Revenue Service to offer extensions to nonprofit organizations and others whose accountants had been affected by the outage.


“I understand details are slim,” a user of news aggregation and discussion website Reddit posted. “Do what ya can, when ya can. — Cooling Boots over here in Virginia.”

Real-world ripples

The reaction to a breach in any industry typically follows a pattern: confusion, panic, anger, then some version of surrender. In some ways, this very human way of dealing with a cyber crisis is appropriate, given that the fault for many of them doesn’t lie with technology, but with people.


The thing is, the very same qualities that make an excellent employee — good client service, empathetic, compassionate — also make them a prime target for hackers, because the easiest way to gain access to systems and data is not through microchips or code-breaking, but by simply asking. Socially engineered hacking remains the biggest security concern in the accounting profession today. That includes methods like phishing, a tactic by which cybercriminals send probing emails posing as a client or other known entity, fishing for sensitive data, access to accounts, or just money. So the fastest path for bad actors? The human touch.


“For most of your readers, phishing is probably the No. 1 threat,” said David Ross, principal and cybersecurity practice leader at Top 100 Firm Baker Tilly. “There’s been a huge uptick in the last few months in spear-phishing attempts, which are very specifically targeted to an individual. Prevention is a twofold approach: On the technical side, you implement systems to filter and catch as many of these emails [as you can] so they don’t get to the end recipient; the other is personnel training.”


One of the ways security consultancies help their clients establish a robust security posture is through penetration testing, also known as pen testing. As well as the penetration of computer systems, probing for weak spots, consultancies will sometimes physically show up at a client’s office and start covertly testing staff for vulnerabilities.


“Helpful people are a real target,” said David Trepp, IT assurance partner at BPM, a Top 100 Firm in California that also provides pen testing and other security services. “It’s an intractable problem for service firms in general that hire people who have a service mindset. The only way to overcome that is through vigilant training, and providing good controls and systems that don’t allow them to get in trouble.”


Helpful staff will more readily respond to a stranger who appeals to their willingness to be of service, Trepp explained. For instance, he may pose as an IT person who just needs to take a “quick look” at an accountant’s laptop to “get his boss off his back” and get a fix done quickly.

“All we need is about three seconds with an unblocked, unattended computer, or an employee willing to believe we’re tech support, or a live network jack somewhere where nothing is plugged into — and we’re in,” Trepp explained.


It’s these in-person tests, and gamification of the training process, that are most successful in making staff as immune as possible to hackers. Videos and lectures are not as effective as basically running a con, as they don’t have the real-world effect of actually duping a trainee, Trepp explained.


“Statistics suggest the average human being falls for a social engineering attack about four times — with training — before they become ‘inoculated’ against that type of attack,” Trepp said.


Three seconds. Four successful attacks. The odds seem stacked against the good guys.

The cybercriminals are winning

“I’m our firm’s audit manager, and people can call me a dinosaur, but I will never allow our financial statement processes to be dependent on a cloud system, especially after this ordeal,” another Reddit user said following the CCH outage. “We don’t store any of our tax data on the cloud either.”


This statement is emblematic of one of the biggest problems in cybersecurity today, and that is that accountants — and lawyers, bankers, doctors and small-business owners — are not technology experts; they’re experts in their own fields. Which means the career cybercriminals, as tech experts using the same technological advances the rest of the world has access to, will always be one step (or more) ahead of the curve.


This Reddit user’s comment is based not on a clear and full understanding of how cloud technology works — in many cases, cloud computing is more secure than on-premise software for a range of reasons — but rather on fear. And fear could prevent the accounting profession from moving forward quickly to adopt new technologies like artificial intelligence and blockchain, allowing cybercriminals to forge ahead with faster and smarter ways to gain access to company information, while the profession lags behind in preventative measures.


“This is a truism, and I hate to admit it, but we’re always behind,” said Jon Murphy, vice president of cybersecurity for RGCybersecurity, an Alliantgroup company. “Bad guys have no unions, labor laws, regulatory requirements, have unlimited terms, can work wherever — it’s a mindset. They love figuring out and breaking things. They’re always finding flaws and exploits before we can fix them.”


Murphy, who also advised Presidents Bill Clinton and George W. Bush on cybersecurity strategies, said a military concept called “defense in depth” is the way to go for accounting firms of any size. Just as a castle will have many layers of protection, from a moat, to a drawbridge, to battlements, boiling oil, and soldiers, so too should a security system have multiple methods of prevention built in.


“We now have blockchain and deep learning to help us,” Murphy said. “Blockchain came from the dark side to hide ill-gotten gains, but we’re starting to use it for good. But prevention is not just a tech thing — it has to be a holistic programmatic approach: people, process, data, technology.”


Norm Comstock, managing director for UHY Advisors, a Top 100 Firm that also provides technology consulting services, advises small firms to allocate their cyber budget wisely between prevention, detection and recovery.


“If you’re cumulatively spending $1 million on cybersecurity, where’s that $1 million being deployed? All on prevention? If nothing is being spent on detection, you create a false sense of assurance,” he explained. “In very recent history, someone as large as Marriott Starwood actually suffered from a significant breach over a five-year period. Prevention methods were in place, but detection tools were not being leveraged, maintained or manned so that they could actually disrupt a large breach from happening.”


The breach Comstock is referring to was discovered by Marriott in 2018, and affected the records of up to 500 million customers. The hotel chain later disclosed that hackers had had access to their system since 2014.


Comstock advises accountants to pay close attention to “mixed environments,” such as the use of personal cell phones for business in a BYOD (bring your own device) office environment. By mixing consumer applications and enterprise applications on a single device, sharing memory and other resources, a user may download malware by accident during personal usage that can then easily infect enterprise data.


Small firms can look to resources such as the National Institute of Standards, which provides a Cybersecurity Framework (, and to industry associations like the American Institute of CPAs (see the AICPA’s Cybersecurity Resource Center on to help build a cybersecurity posture that protects their clients and fits into their budget.


It can seem an insurmountable task to face down cybercriminals and come out on top. Sometimes it feels like a breach is inevitable, and it’s only a question of when. But professional services firms are growing a network of advisors, software and resources to build out cybersecurity and strengthen their security posture. The first step is to take cyber seriously, because all it takes to wipe away a lifetime of client goodwill and data is three seconds. AT




IRS warns of higher penalties for filing after June 14

By Michael Cohn


The Internal Revenue Service issued a warning Friday to taxpayers who haven’t yet filed their 2018 tax returns that they will face higher tax penalties if they owe taxes and haven’t filed by June 14.


The IRS lowered the threshold for imposing underwithholding and underpayment penalties earlier this year during tax season because of the complications in the 2017 tax law and the various changes it made in the withholding rules, but that still doesn’t change the failure-to-file penalty. The IRS noted that the failure-to-file penalty is assessed if there is unpaid tax and the taxpayer fails to file a tax return or request an extension by the April due date. That penalty is generally 5 percent of the amount of tax for the year that’s not paid by the original return due date. The IRS charges the penalty for each month or part of a month that a tax return is late. If the return is over 60 days late, there’s a minimum penalty, either $210 or 100 percent of the unpaid tax -- whichever is less.


The IRS acknowledged, however, that special deadlines can affect the penalty and interest calculations for those who qualify, such as members of the military in combat zonestaxpayers residing outside the U.S., and those living in federally declared disaster areas.


Taxpayers who live in a combat zone, such as members of the military, can extend the filing deadline. They can find details in Publication 3, Armed Forces’ Tax Guide. For taxpayers who live and work outside the U.S. and Puerto Rico, or on military duty, the deadline to file is June 17. They also have until June 17 to file Form 4868 for an extension until October 15. An extension of time to file is not an extension of time to pay any tax due.


Taxpayers who have been affected by a presidentially declared disaster who receive a late filing or late payment penalty notice in the mail from the IRS, and who have filed or paid by the deadline stated in the IRS news release of postponement of the deadlines for filing and/or paying, should call the number on the notice to find out if IRS can abate the tax penalty in the wake of the disaster.


Taxpayers who have filed their taxes and paid on time and haven’t been assessed any penalties for the past three years can often qualify to have the penalty abated. See the First-Time Penalty Abatement page on IRS.govfor further info. Taxpayers who don’t qualify for the first-time penalty relief can still qualify for penalty relief if their failure to file or pay on time was due to reasonable cause and not due to willful neglect. They should read the penalty notice and follow the instructions to ask for the relief. For more, see the Penalty Relief page on


Earlier this year, the IRS expanded the penalty waiver for those whose 2018 tax withholding and estimated tax payments fell short of their total tax liability for the year. The penalty will be waived this year for any taxpayer who paid at least 80 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. The usual percentage threshold is 90 percent to avoid a penalty, but the IRS lowered the penalty because of requests from Congress and complaints about all the changes in the withholding rules after the new tax law that led many taxpayers to underwithhold and end up owing taxes when they had their tax returns prepared.




6 money myths to ignore


Key takeaways

  • Establish good saving habits. Be sure to save some money from every paycheck.
  • Invest your savings appropriately for your goals and time frame.
  • Debt isn't always bad but must be used responsibly.


There is no shortage of bad information out there—and falling for some of it can cost you money. It could be other people who steer you in the wrong direction, or it could be the things you tell yourself. Whatever the source, believing these myths could be hazardous to your financial health.


Get the truth behind these bits of financial misinformation.


Myth #1: All debt is bad.

In reality: It’s true that carrying a balance on your credit card or a high-interest loan can cost a lot—significantly more than the amount you initially borrowed. But not all debt will hold you back. In fact, certain types of debt, like mortgages and student loans, could help you move forward in life and achieve your personal goals.


They’re often thought of as “good” debt because the debt is funding an investment—a home or an education, which can be financially beneficial. The interest rates on mortgages and student loans are typically much lower than those on personal loans or credit cards, and the interest may be tax deductible. Even so-called “bad” debt like using a high interest rate credit card can be beneficial in some cases. Note that it is possible to take on too much good debt. (See Myth #3 below.)


No matter what kind of debt you take on, make sure you shop around for the best rates and never borrow more than you can afford to pay back on time.


Myth #2: It's not worth saving if I can only contribute a small amount.

In reality: If you start early, around age 25, saving 15% of your paycheck—including your employer’s match to your 401(k) if you have one—could help you save enough to maintain your current way of life in retirement. It sounds like a lot, but don’t lose your motivation if you can’t save that much. Don't be discouraged if you start later than age 25. Beginning to save right now and gradually increasing the amount you're able to put away can help you hit your goals.


Save as much as you can while still being able to pay for essentials like rent, bills, and groceries. Think of it this way—running a marathon is an impressive accomplishment, but that doesn't mean a 3-mile run isn't worthwhile!


Read Viewpoints on Just 1% more can make a big difference


Myth #3: Credit cards should be avoided.

In reality: As long as you pay off your card balance in full each month to avoid interest, making purchases with credit can be worthwhile. Many credit cards offer a rewards program. If you make all your everyday purchases with your card, you could quickly rack up points you can redeem for cash, travel, electronics, or to invest.


Also, demonstrating that you use credit responsibly can help you increase your credit score, making it easier to buy a car or a home later on. It may even earn you a lower interest rate when you borrow in the future.


It can be difficult to dig out of credit card debt, but if you control your spending and pay the card off every month, it could pay you back.


Read Viewpoints on 7 credit card tips


Myth #4: The stock market is too risky for my retirement money.

In reality: It’s true that money in a savings account is safe from volatility—unlike money invested in the stock market. But it won’t grow much either, given that current interest rates on savings accounts are so low. When it’s time to withdraw that money for retirement a few decades from now, your money won’t buy as much because of inflation. The stock market, however, has a long history of growth, making it a more appropriate choice for most or part of your savings in the long term.


For instance, for a young person investing for retirement, a diversified investment strategy based on your time horizon, financial situation, and risk tolerance could provide the level of growth you need to achieve your goals. You don’t need to invest only in stocks to benefit from stock market growth though. Choosing a diversified investment mix of stocks and adding securities such as bond mutual funds or certificates of deposit, which historically have not moved in lockstep with stocks, can reduce the overall level of risk in your portfolio. That means you usually won’t experience as much volatility in your investment mix as with an all-stock portfolio.


There are a variety of ways to invest. Building a diversified portfolio based on your needs and the length of time you plan to be invested can be as complicated or as simple as you prefer. You can build your own portfolio with mutual funds or exchange-traded funds—or even individual securities.


If you find investing daunting or don’t have the time to figure it out just yet, you might consider a managed account or a target-date fund for savings that are earmarked for retirement. With a target-date fund, you pick the fund with the target year closest to when you want to retire. The target-date fund manager selects, monitors, and adjusts the investment mix to match the target retirement date. With a managed account, you answer questions about yourself and why you're investing, and investment professionals build a portfolio around your goals and then work with you to keep it on track. Whatever gets you into the market and helps you stay there could be better in the long run than procrastinating and suffering the lost opportunity of not being invested.


Myth #5: I’m young, so I don’t need to save for retirement now.

In reality: It’s tempting to put off preparing for retirement while you work on paying off student loans, saving for a house, and putting kids through school. These goals feel immediate, while retirement is so far away.


But having time on your side can actually be one of the best reasons to start saving for retirement now. That’s because you may not be considering the opportunity cost of not being in the market.

Compounding happens when you earn interest or dividends on your investments. As interest is reinvested, the value of your investments grows—because the value is slightly higher, it earns even more interest, which is then packed back into the investments and it grows even more. Over time, the value can snowball because more dollars are available to benefit from potential capital appreciation. But time is the secret ingredient—if you aren’t able to start saving early in your career you may have to save a lot more in order to make up for the value of lost time.

A tale of two investors

You can start by contributing to your 401(k) or other workplace savings plan. If your employer matches your contributions, make sure you contribute up to the match—otherwise you’re basically giving up free money. If you don’t have a workplace retirement account, don’t worry. You’re in good company. Many people don’t have the option, but you still have options for saving for retirement. Consider opening an IRA to get started.


Read Viewpoints on 5 common money mistakes to avoid and Traditional or Roth account—2 tips for choosing


Myth #6: There’s no way of knowing how much money I’ll need in retirement.

In reality: How much you’ll need depends entirely on your situation and what you plan to do when you leave the workplace. It’s pretty likely that your lifestyle could change dramatically between age 25 and 65, so it may be hard to picture how you’ll live in retirement or how much money will be required.


But Fidelity did the math and came up with some guidelines. Aim to save at least 15% of your pretax income every year—including employer contributions. To see if you’re on track, use our savings factor: Aim to have saved at least 1x (times) your income at 30, 3x at 40, 7x at 55, and 10x at 67. Of course, everyone's situation is unique and you may find that you need to save more or less than this suggestion.


Don’t worry if you’re not always on track. Saving consistently, increasing your contributions when you’re able, and investing for growth in a diversified mix of investments could help you catch up over time. The important thing is to keep saving and investing no matter what life throws at you through the course of your career.