Back to top


After Troubled Season, Liberty Forms Compliance Group



Liberty Tax Service has developed an executive task force to examine issues within the company “and take aggressive action” to ensure all franchisees meet the tax prep giant’s standards.


Liberty closed several offices nationwide after the IRS and other authorities questioned returns processed by offices in New York, California and Maryland.


“In the last several months, the company’s internal compliance program has identified issues at franchise locations that have led Liberty to close or take over certain offices. State and federal authorities have been involved with some of these offices,” the company said in a statement.


 “An extremely small percentage of franchisees are under scrutiny. Where we have found violations, we have terminated franchisees and in some cases even brought legal suit,” said John Hewitt, founder and CEO.

Gordon D’Angelo, a member of the board of directors, will head the task force.

Liberty said it has also “enhanced its compliance and risk management department to uncover violations, blacklist tax preparers suspected of wrongdoing and report those suspicions to the IRS.”




IRS Caught Over 30,000 Tax Returns Involving ID Theft



The Internal Revenue Service’s expanded use of controls this tax season to identify fraudulent refund claims before accepting them into its processing system has allowed the IRS to identify approximately 35,000 fraudulent e-filed tax returns and 741 paper tax returns as of Feb. 29, 2016, according to a new government report.


The report, from the Treasury Inspector General for Tax Administration, said the IRS also identified and confirmed 31,578 fraudulent tax returns involving identity theft as of Feb. 29, 2016, and identified 20,224 prisoner tax returns for screening as of March 5, 2016.


TIGTA released its annual interim report Thursday on the IRS’s performance during tax-filing season, defined as the period from January 1 through mid-April. TIGTA plans to issue the final results of its analysis of the 2016 filing season in September.


State tax authorities have also been stepping up the battle against identity theft and tax fraud, in line with the IRS’s Security Summit and Taxes.Security.Together public awareness campaign. New York State Governor Andrew M. Cuomo announced Thursday that the New York State Department of Taxation and Finance stopped more than 239,000 suspicious refund claims during the income tax season. As a result, the department saved taxpayers $400 million—an increase of 18 percent over the same time period last year.


“We have zero tolerance for those who seek to cheat the system at the expense of hard-working New Yorkers,” Cuomo said in a statement. “By using first-rate technology, this administration is cracking down on would-be scammers and stopping this fraud right in its tracks.”


The TIGTA report acknowledged the IRS was challenged by Congress’s late passage of legislation last December extending a number of expired tax provisions. To reduce the impact on the filing season, the IRS monitored the status of the legislation and took steps to implement the extension of these provisions prior to their enactment. These efforts enabled the IRS to begin accepting and processing individual tax returns on Jan. 19, 2016, as originally scheduled.


As of March 4, 2016, the IRS received approximately 67 million tax returns, of which 62.6 million (93.9 percent) were filed electronically and 4 million (6.1 percent) were filed on paper. The IRS has issued 53.5 million refunds totaling more than $160 billion. 


In addition, as of Feb. 25, 2016, the IRS processed 1.4 million tax returns that reported $4.4 billion in Premium Tax Credits that were either received in advance or claimed at the time of filing. More than 2.7 million taxpayers reported shared responsibility payments totaling $1 billion for not maintaining required health insurance coverage.


As of March 5, 2016, approximately 46.1 million taxpayers contacted the IRS by calling the agency’s various Customer Account Services function’s toll-free telephone assistance lines. IRS assistors have answered 7.3 million calls and provided a 72.8 percent level of service, with a 9.6 minute average speed of answering calls.


That was a big improvement over last filing season thanks to $290 million in extra funding from Congress earmarked toward improved taxpayer service, cybersecurity and efforts against identity theft. The Government Accountability Office reported earlier this month that the level of service this tax season was 76 percent, a 33 percentage point increase over last year, while the average wait time dropped to 9 minutes, an improvement of about 70 percent from last year (see IRS Funding Boost Helped Taxpayer Service). The extra funding enabled the IRS to hire 1,000 temporary employees this tax season, but IRS Commissioner John Koskinen predicted the service level would drop to 47 percent for the full year once the temporary employees were gone (see IRS Improves Phone Call Responsiveness).


During fiscal year 2016, the IRS plans to assist 4.7 million taxpayers through face-to-face contact at its walk-in Taxpayer Assistance Centers, which is a 16 percent decrease from fiscal year 2015. The IRS also continues to offer self-assistance options that taxpayers can access 24 hours a day, seven days a week, including its IRS2Go app; YouTube channels; interactive self-help tools on; and Twitter, Tumblr and Facebook accounts.




IRS Scammers Demand Payments on iTunes Gift Cards



The Treasury Inspector General for Tax Administration issued an alert Friday warning that it has received information that callers impersonating IRS employees or the Treasury Department are demanding payments on iTunes Gift Cards.


TIGTA noted that the scam callers may also request payment of taxes on Green Dot Prepaid Cards, MoneyPak Prepaid Cards, Reloadit Prepaid Debit Cards, and other prepaid credit cards.  The alert stressed that these are fraudulent calls, and any call requesting that taxpayers place funds on an iTunes Gift Card or other prepaid cards to pay taxes and fees is an indicator of fraudulent activity.


TIGTA pointed out that no legitimate U.S. Treasury or IRS official will demand that payments via Western Union, MoneyGram, bank wire transfers or bank deposits be made into another person’s account for any debt to the IRS or Treasury.


If taxpayers receive such calls, they should hang up on the fraudulent callers and go to the TIGTA scam reporting page to report the call.




Tax Strategy Scan: Deducting Investment Manager Fees


Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.


Deducting investment management fees: Clients are entitled to deduct investment management fees charged by their financial advisors, according to The Monterey Herald. However, these fees cannot be deducted if investors are subject to the Alternative Minimum Tax. Retirement savers are advised to pay these fees outside their retirement plans to make the fees tax-deductible, while those who are already retired should pay these fees inside the account so the payment will be excluded from their taxable income. -- The Monterey Herald


How Roth IRAs lower your client's tax bill: Although a Roth IRA does not offer upfront tax deductions for contributions like a traditional IRA, Roth investors will enjoy many tax benefits, such as tax-free growth and withdrawals in retirement, according to Investors are likely to end up with $3 for every $1 contributed to Roth, or possibly even higher for younger investors. Also, a Roth IRA offers broader investment options and is not subject to required minimum distributions unlike a traditional IRA and 401(k) plan.


Municipal bonds offer a compelling counterbalance to equity risk: Municipal bonds are a good investment option for clients who want to keep their capital intact and get tax-free income at the same time, according to Yahoo Finance. Tax-exempt muni bonds are not subject to federal taxes, and they also are taxed in some states. Including muni bonds in their portfolio is an effective way to counterbalance equity risk, as these bonds perform well amidst market volatility and offer higher returns than regular bonds. -- Yahoo Finance


Are delayed annuities a good buy? Although delayed annuities offer tax-deferred growth on the principal, the earnings are subject to ordinary income tax upon withdrawal, according toFlorida Today. This investment option is not recommended if there are no riders to guarantee an income or a death benefit. Clients are advised to invest within an IRA, which offers the same benefits as delayed annuities without the hefty fees and internal costs. -- Florida Today





The Hosted Alternative

Between cloud-based and in-house lies a third way



Cloud-based applications are getting a lot of attention these days. And there are some definite pluses to moving toward applications that were designed and constructed to be solely based in the cloud.


But as good as these applications may be, and there are indeed some excellent applications that are available only in the cloud, there’s a lot to be said about established in-house applications that have been continually improved and updated over the years.


We surveyed several of the major players in the hosting market, as well as a number of consultants in the field, and asked them to point out the pluses and minuses of different approaches. They also were asked to offer their views on trends in the industry.


Participating in our survey were Robert Chandler, president and CEO of Cloud9 Real Time; Roy Keely, vice president of market strategy for Xcentric; James Bourke, partner and technology niche practice leader at Top 100 Firm WithumSmith+Brown; Adam Stern, founder and CEO of Infinitely Virtual; Ann Geisel, director of development and design at Cougar Mountain Software; Ryan Overtoom, partner of hosting and managed services at Top 100 Firm Sikich; and Ed Page, managing director and financial services industry IT consulting practice leader for business consulting firm Protiviti.


This stellar virtual panel agreed on much, but also offered some individual insights into where the bumps in the road might be and where the industry might be heading.




For the most part, the hosting vendors who participated in our survey all provide accounting-oriented applications, though some offer hosting in other areas as well. QuickBooks, Microsoft Dynamics, Bloomberg BNA, Thomson Reuters, Drake and Lacerte were just several of the applications vendors mentioned to us. Cougar Mountain Software hosts its Denali accounting software on an Applianz Technologies’ private cloud, as well as providing it for in-house implementation.


But “hosting” doesn’t necessarily mean the same thing every time the term is used. The most common use of the term is for SaaS, or Software-as-a-Service — but it can also mean Infrastructure-as-a-Service. SaaS is when a hosting vendor provides specific applications for you that are also generally available for on-premises installation. These can be accounting or tax preparation applications, and sometimes include other applications such as an office suite or time and billing. All of these applications and others are available as hosted services.

Infrastructure-as-a-Service is the term used when a hosting vendor provides all of your computing needs other than the client’s PCs and devices used to access their cloud. And that brings up the matter of public and private clouds.


A private cloud is basically a localized data center, either on your premises, or belonging to the hosting vendor. A public cloud is when the hosting vendor uses one of the available major cloud service providers. Two of the best known of these are Amazon Web Services and Microsoft Azure. The vendor’s hosting server that runs the application is a virtualized server located within the public cloud.


Withum’s Bourke sees a shift in where applications are being hosted: “We are starting to see a shift away from the vendor cloud to more of a public cloud approach in the cloud services space.” He believes that the public cloud approach gives the practitioner a comfort level that the vendor will not hold their data captive in the event of a dispute, or the firm will not be subject to technology disruptions that may take place within a vendor.


“An ideal platform would be something like Microsoft’s Azure platform, where the firm is leveraging the power, security and budget of a company like Microsoft to house their practice management system and data,” Bourke told us.




Almost all of the vendors we queried agreed on the benefits of hosting, and unsurprisingly, these tended to mirror the advantages of cloud accounting as well.


Accessibility is one important factor that all of our respondents seem to agree on. Having a client’s accounting data available from any place you have an Internet connection and 24/7 is a major advantage.


Reduced cost and reliance on an IT department is another factor most of the vendors mentioned, along with a reduced need to contend with updates and equipment upgrades. “Businesses no longer have to build, secure, and support IT centers or server areas. This reduces physical space and the utilities — for example, electricity — needed to operate,” according to Cougar Mountain’s Geisel. She also made mention of dependability, noting that many hosting vendors provide service level agreements that guarantee a high level of availability and dependability.


Another point of agreement is scalability. A hosted accounting application can easily and cost-effectively be scaled upward or down according to the immediate needs of your firm and its clients.




But while there is a large consensus about the benefits of hosting applications in the cloud, our vendor panel did point out some areas to consider as potential stumbling blocks.


“Small businesses should be clear about the differences between hosted solutions and cloud-based accounting. Hosted solutions provide much greater mobility, greater security, and data access assurance. Cloud-based solutions offer lower initial cost but the lack of control, customization and data security may outweigh the savings,” we were told by Cougar Mountain’s Geisel.


A number of vendors pointed out the importance of a reliable and high-availability Internet connection. Xcentric’s Keely noted that when the only way to access the hosted app is via the Internet, it’s not a practical solution where a quality Internet option either does not exist, or is not reliable enough for business use.

Cloud9 Real Time’s Chandler noted that bandwidth is also a concern. These operational concerns apply not only to your practice, but to all parties outside of your facilities that might require access to the application, including clients and mobile employees.


And while we tend to think of Internet access as ubiquitous, there are still plenty of areas where there is spotty DSL, only satellite Internet, or no Internet access at all.


Another area that Keely points out where a hosted solution might be viewed as being vulnerable is when the client (or your firm) is subject to auditing.


With an off-premises hosted accounting solution, the question of internal control, both in the area of accessing the remote application, and the internal control procedures and standards of the hosting vendor, are going to be looked at stringently. Most vendors of hosted solutions are very aware of these concerns and take great pains to implement sufficient controls. But some major benefits of a hosted solution (which is also true of cloud-based applications) are self-service, as well as restricting access to authorized users and specific user roles. A hosting provider can help in this area, but the ultimate responsibility is yours.


That brings up another area of concern for both hosted and cloud-based accounting solutions — compliance. When a client’s accounting is performed entirely on premises, you are responsible for governance and compliance with HIPAA, Sarbanes-Oxley, and other compliance requirements. Moving the application over to a hosting supplier doesn’t free you from these responsibilities. And it does add another layer of responsibility that you need to be aware of and concerned with.


Sikich’s Overtoom expands on this concern: “We see consolidation in the industry, and we believe the larger players (AWS, Azure, etc.) will be the ones left standing. We also see the cloud/hosting industry maturing. The larger players have the financial backing to attain and keep the proper credentialing (PCI, HIPAA, SOC, etc.), which is critically important for those customers that have compliance needs.”


Cougar Mountain’s Geisel noted, “A business may be better off with a non-hosted solution (on-premise, for example) if there are concerns about sensitive customer data being compromised or a government or educational entity wishes to make use of existing IT infrastructure/secure data center. For example, multi-party payment of medical industry invoices may include sensitive information that on-premise implementation would better protect. Or a county department might want to use existing county IT infrastructure and management.”

Infinitely Virtual’s Stern pointed out another area of concern, which he calls “Provider Roulette.” “Of late, there has been a great deal of shifting around among providers. On that front, two somewhat counterintuitive things are happening in the hosting market — new market entries and significant market consolidation — resulting in a bit of chaos. Small providers have emerged, but there’s no assurance that they’ll be around; some could be purchased (and others have been),” he told us. “Accounting firms are wise to select vendors who have demonstrated some staying power, since stability is crucial for both a firm and its clients. On the other end of the spectrum, market consolidation has meant that once again, big fish are being eaten by even bigger fish. And from the point of view of even a fairly large accounting firm, consolidation isn’t likely to mean better/more responsive service. If recent history is any guide, the opposite has been the case.”


And Sikich’s Overtoom pointed out still another situation where a hosted approach might not be the best way to go: “Some legacy applications do not migrate well to the cloud, or the cost to re-write the applications to be ‘cloud-friendly’ is prohibitive. Further, some industries, such as manufacturing, have a significant amount of production network/application activity happening on premise. As a result, transferring all that activity to a cloud solution, where all user and machine input is sent back and forth to the cloud provider, can be challenging and may not be prudent.”




Xcentric’s Keely cautioned against assuming that every hosting vendor is offering the same benefits: “Hosting continues to be commoditized. The additional features that make end users’ lives simpler and more integrated is a trend that many providers are moving to.” Keely also added that he believes that low-cost providers will continue to focus on costs and not necessarily provide these benefits.


But, as should be expected, given the makeup of our panel, our respondents feel that hosting is an approach that will continue to become more attractive as time goes on, even compared to cloud-based applications. Some see this happening as firms and clients simply transfer the responsibility for existing applications out of house, others see it as a way to reduce IT department expenditures.


That’s not necessarily a good thing, Xcentric’s Keely warned: “People think that going to the cloud means they don’t have to worry about their local network and computers, as far as security and routine maintenance, since it’s all in the cloud. This is not the case, and the hosting provider they pick should be offering solutions to secure and manage their local network.”


Protiviti’s Page agreed: “We also see industry-specific considerations — particularly for those industries with high regulatory oversight — emerging as differentiators in cloud adoption. Industries such as financial services and health care must consider regulatory requirements carefully as they consider cloud hosting options. This should not, however, be viewed as an insurmountable impediment, but rather as an additional set of requirements.”


Still, all of our respondents agree that movement to the cloud, whether using hosted applications or those specifically designed and developed to be cloud-based, is not going to slow down any time in the foreseeable future. As Cloud9 Real Time’s Chandler put it, “Things happen in life and they also happen in technology. It’s not if but when.”




Delaware's $1 Billion Opacity Industry Gives U.S. Onshore Tax Haven



Chevron Corp. used a shell company in a tax haven to escape hundreds of millions of dollars in Australian taxes, according to a 2015 court ruling. The subsidiary, which allowed Chevron to eliminate Australian taxes on $1.7 billion in profit earned there, wasn’t secreted away on a remote tropical island—it was set up in the very mundane locale where corporate secrecy was born: Delaware.


For more than a century, Delaware has lured companies to file incorporation papers there by offering a specialized court system, laws that allow for avoiding other states’ taxes and a registration system that requires little public disclosure. Today, two-thirds of the Fortune 500 companies and 60 percent of U.S. hedge funds are registered there. That success has become a template for tax havens from Singapore to the Cayman Islands to Panama—where a recent leak of millions of documents has revealed the questionable uses of many shell companies and put financial secrecy in headlines globally.


Delaware still stands out for its emphasis on privacy, which garnered for it the label of world’s most secretive jurisdiction twice over the past decade—once by the Tax Justice Network and another by National Geographic magazine. While most businesses registered there are legitimate, critics say the secrecy provides cover for some shell companies owned by miscreants, from corrupt dictators to money launderers, drug dealers, tax cheats and arms merchants. Yet the business of registering businesses is important to Delaware’s economy and state revenue, and residents and leaders are quick to defend it.


Muted Response

The leak of the so-called Panama Papers, which exposed secretive companies’ roles in evading taxes, hiding corruption and financing organized crime, “brings into vivid focus the need to address money laundering and other criminal activities by people misusing U.S. legal entities,” said Delaware Secretary of State Jeffrey Bullock, in a statement. But Bullock suggested that the most effective way to instill more transparency is through federal legislation.


While stories about the documents’ contents have brought calls for more regulation and transparency in Europe, the Caribbean and Central America, the U.S. response has been muted. The federal government has for years refused to sign on to international standards for disclosing income, and Delaware officials are thus far resisting calls to amend state law to require more transparency.


“Who’s going to pressure them—some Swedish journalist?” said Sheldon D. Pollack, a University of Delaware law professor. “It is a huge source of income for the state, and a major part of its economy, so if anything, it might go the other way, and offer companies more privacy, to compete with other states like Wyoming and Nevada.”


Other tax havens have tried to mimic its success—Oregon has been called “Delaware of the West” and Luxembourg dubbed “the Delaware of Europe”—but no place else has come close to matching Delaware.


The state now has more business entities (about 1.1 million) than residents (about 935,000). One well-documented icon in this Mecca of corporate anonymity is a squat brick office building at Wilmington’s 1209 Orange Street. It’s the corporate home of more than 285,000 companies, including Alphabet Inc., Ford Motor Co. and Wal-Mart Stores Inc.—even if their operations are headquartered in Mountain View, California; Dearborn, Michigan; and Bentonville, Arkansas.


New York-headquartered Bloomberg LP, the parent of Bloomberg News, is a limited partnership organized under Delaware law.


Delaware offers legitimate companies benefits that include an easy and inexpensive registration process and laws that are more favorable to corporate mergers than other states, said Douglas Cumming, a business professor at York University in Toronto. “The state has made it clear that it is very pro-business,” said Cumming, who has studied the business advantages that Delaware offers hedge funds.


In 2015, Delaware registered more than 480 companies a day, providing steady business for in-state lawyers, accountants, and registration companies. Two firms, Corporation Trust Company and Corporation Service Company, act as the registered agent for two-thirds of the businesses. Both said through spokesmen that they comply with all state and federal laws.


Revenue Source

Companies’ registration fees provide more than $1 billion in annual state revenue. Would-be reformers in Delaware tread carefully—despite the state having registered shell companies controlled by such notorious figures as Viktor Bout, the Russian “Merchant of Death” who authorities believe provided arms to the Taliban, and Luka Bojovic, whom officials linked to the assassination of Serbia’s prime minister.


It’s also home to a shell company controlled by a tequila distillery that the Mexican government is investigating for possible ties to cartel leader “El Chapo.”


“We can reform our laws to provide sufficient privacy for businesses without continuing to have secrecy that puts the national security at risk,” said Christine Whitehead, a member of Delaware Citizens for Open Government, which has pushed the state to require more transparency.


In neighboring Pennsylvania, governors and lawmakers rail against losing an estimated $500 million a year in revenue to Delaware’s system, but they’ve had little success stemming that tide. Companies can cut their home-state taxes with the “Delaware Loophole”—forming a passive investment corporation in the state and transferring their intellectual property there, where payments of royalties or interest incur no state tax.


When the U.S. government pushes other countries toward stricter disclosure requirements, foreign leaders frequently cite Delaware as an example of American hypocrisy and an obstacle to improvements. Austrian finance minister Maria Fekter, for instance, rebuffed calls to end bank secrecy in 2013, saying nothing had been done to stop “money laundering in all the islands … or the U.S. in Delaware.”


Delaware surfaced last year in an Australian tax case that revealed Chevron had used one of its 200 Delaware subsidiaries to take out a $2.5 billion loan at an initial interest rate of 1.2 percent and then lent the proceeds to Chevron Australia Holdings Pty Ltd. at 9 percent. The intracompany transactions transformed Chevron’s $1.7 billion Australian profit into interest payments and cut its potential Australian tax bill from $258 million to zero.


Lower Rates

Chevron officials said the loans were legal and the company has paid all required taxes. In testimony to the Australian Senate last year, senior Chevron officials also pointed out that the profit was still subject to federal tax in the U.S. Company filings show that Chevron frequently reduces its U.S. tax bill by using hundreds of millions of dollars’ worth of write-offs, business credits and prior losses—which are legal and widely used tax strategies. During most of the years at issue in the Australian case, the company’s effective U.S. federal tax rate was lower than Australia’s 30 percent rate, according to calculations compiled by the advocacy group Citizens for Tax Justice.


An Australian court has ordered Chevron to pay back taxes, interest and penalties of more than $300 million. Chevron spokesman Bradley Haynes said the company cannot discuss the case in detail because it’s appealing that decision.


Congressional hearings about the perils of shell companies over the past decade have spurred Delaware officials to make a few changes—most notably a requirement that every business registered there list the name and telephone number of at least one contact person, usually a lawyer.


“It’s pointless,” said Heather Lowe, legal counsel and director of government affairs at Global Financial Integrity, a non-profit that advocates for greater transparency. “The bottom line is the state still has no idea who owns or controls the company. There’s not an officer, director or shareholder. Just a lawyer and they protect the identity because of lawyer-client confidentiality.”


No state requires companies to list beneficial ownership. Delaware has shown little inclination to be the first—a move that would almost certainly drive businesses to seek more private filings in Wyoming, Nevada or other states. Instead, Governor Jack Markell and other leaders have expressed support for a proposal from President Barack Obama’s administration that would apply to all states: Require every U.S. business entity to obtain a tax ID number that the Treasury Department could share with law enforcement agencies.


Such proposals have been blocked in Congress, where they’re opposed by the Chamber of Commerce and other business groups as well as the National Association of Secretaries of State. There’s little indication that’ll change, said J. Richard Harvey, a former top tax official at the IRS and Treasury Department who now teaches law at Villanova University.


“I would not hold my breath waiting unless the Panama Papers and U.S. corporations can be directly linked to terrorist financing,” Harvey said. If a strong link to terrorism were established, he said, “U.S. policy could change and change quickly.”




Tax Strategy Scan: Extra Taxes on Boomers?


Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.


What triggers extra taxes on Baby Boomers? Retirees should expect that their Social Security retirement benefits could be subject to income tax, and are advised to consider voluntary withholding if the benefits will be taxed, according to The Detroit Free Press. They are also advised to watch out for the Net Investment Income Tax when selling stocks or property, and to consider donating to charity directly from their IRA when they turn 70-1/2, as the donation will be counted towards their required minimum distribution. Medical and dental expenses are tax deductible if they reach 65 and the costs are more than 10% of their adjusted gross income, while 401(k) withdrawals before the age of 59-1/2 can trigger a 10% penalty. -- The Detroit Free Press


Complications that arise for family members co-investing in real estate: Tax complexities arise when parents co-own real estate investments with their children, according to The Washington Post. Parents should ask crucial questions before deciding to sell the property. There are tax advantages the investor should know before making any changes. -- The Washington Post


4 investment strategies that make paying taxes optional:Clients who invest in real estate can avoid taxes on capital gains of up to $250,000 for singles or $500,000 for couples if they make the property their primary home for two of the five last years before selling it, according to USA Today. Investing in individual stocks is another good option, since they don't pay capital gains tax until they sell these investments. Income from muni bonds is also non-taxable, while Roth IRA offers tax-free withdrawals in retirement. -- USA Today


5 tax breaks for hiring new employees: Hiring new employees enables employers to claim tax breaks and reduce their tax liability, according to Small Business Trends. The Work Opportunity Credit is given to business owners who employ food stamp recipients and other groups of workers, while employers who hire workers in distressed and Indian reservation areas are eligible for the Empowerment Zone Credit and Indian Employment Credit. Employers also can claim the research credit for up to $250,000 in payroll taxes while several states also offer income tax credits for employers hiring new workers. – Small Business Trends


Alternative Minimum Tax: 3 things every client must know: Here's three things many clients don't know about the Alternative Minimum Tax, according to The Motley Fool. For one, the AMT in its current form dates back to 1982, and was originally set up to ensure that high-income taxpayers paid at least a minimum rate of tax. -- The Motley Fool





House Democrats Introduce Bill to Raise Estate Tax Rate



Rep. Sander Levin, D-Mich., the ranking member of the tax-writing House Ways and Means Committee, and other House Democrats introduced legislation Wednesday to restore the estate tax and gift tax rate and exemption level to the same amounts as in 2009.


At the beginning of January 2013, Congress passed legislation raising the estate tax rate to 40 percent (up from 35 percent), with an exemption for estates below $5 million, but indexed for inflation. Under current law, estates valued at or below $5.45 million ($10.9 million for a couple) are exempt from owing any estate tax.


The proposed legislation, The Sensible Estate Tax Act of 2016, would return the exemption and tax rate to 2009 levels, lowering the estate tax exemption to $3.5 million ($7 million jointly) and increasing the maximum tax rate to 45 percent. The bill would also restore the rates for the gift tax and generation-skipping transfer tax. It would reinstate the $1 million lifetime gift exemption and retain the annual $14,000 gift tax exclusion and unlimited spousal portability. A summary of the bill is available here.


 “Over the past decade, fewer and fewer estates have been required to pay the estate tax, further exacerbating the growing issue of wealth inequality in our nation,” Levin said in a statement. “This disturbing trend is yet another stark example of how broken and unfair our tax code is, which is why we have to take action. Requiring more of the wealthiest estates to pay the estate tax and raising the estate tax rate are commonsense steps we can take toward making our tax code fairer.”


He noted that fewer than 5,200 estates owed any estate tax in 2015, resulting in 99.85 percent of all estates across the country owing no estate tax. Under current law significant appreciated assets pass tax-free without being subject to any tax on their appreciation, even after transfer and subsequent sale.

The Obama administration has included a proposal to set the estate and gift tax to 2009 levels in each of its previous budget proposals, which the Joint Committee on Taxation estimated last month would save more than $161 billion over 10 years.


Cosponsors of the bill include Democratic Whip Steny H. Hoyer, D-Md., Ways and Means Committee members Charles B. Rangel, D-N.Y., Richard E. Neal, D-Mass., Earl Blumenauer, D-Ore., Bill Pascrell, Jr., D-N.J., and Joe Crowley, D-N.Y., and Budget Committee ranking member Chris Van Hollen, D-Md.




IRS Reports an Increase in the Tax Gap



The Internal Revenue Service reported that the average annual tax gap has increased to $458 billion for tax years 2008-2010, compared to $450 billion for tax year 2006.


The voluntary compliance rate was 81.7 percent for tax years 2008-2010, compared to 83.1 percent in tax year 2006. The IRS periodically estimates the tax gap, which provides a broad view of compliance with federal tax laws. The report found there has been no significant change in the amount of the tax gap or the rate of compliance since the last report was issued for tax year 2006.


“The figure of $458 billion doesn’t account for the revenue brought in through enforcement activities, such as audits and document matching,” IRS Commissioner John Koskinen said during a conference call with reporters Thursday. “After factoring in those activities, the average net tax gap for this period is estimated to be $406 billion per year. This continues to show that both solid taxpayer service and effective enforcement are needed for top-notch tax administration.”


Koskinen noted that factors such as third-party information reporting and withholding tend to increase the compliance rate. “The compliance rate is very high for income that is subject to third-party information reporting, and higher still when you also have withholding,” he said. “The study found that when there is information reporting, such as 1099s, income is underreported only about 7 percent of the time. That number drops to 1 percent for income subject to both third-party reporting and withholding. But the number jumps to 63 percent for income not subject to any third-party reporting or withholding.”


The small increase in the estimated size of the tax gap and small decrease in the voluntary compliance rate are largely attributable to improvements in the tax gap estimation methodology, and do not represent a significant change in underlying taxpayer behavior, according to the IRS. The changes also reflect the overall decline in the nation’s tax revenues due to the severe recession during the time period covered by the study, as well as changes in the mix of income sources that have different compliance rates.


Koskinen acknowledged there has been a small drop in the voluntary compliance rate for 2008-2010 since the earlier study for 2006, but the IRS doesn’t believe this represents a change in underlying taxpayer behavior.


“Instead, this likely reflects factors such as the overall decline in the nation’s tax revenues due to the severe recession, as well as improved estimation techniques,” he said. “I would note that since the last tax gap estimates for 2006, new data have become available, and these have been used in developing the current estimates. So the measurement methods are improving.”


However, Koskinen pointed out that the IRS is continuing to look for other ways to keep the voluntary compliance rate high. “These include such things as our educational efforts aimed at preparers and taxpayers; ongoing efforts to improve compliance in the international tax arena; and working with businesses on employment tax issues,” he said. “The IRS also continues to work with Congress on providing new tools to help address compliance issues, such as the legislation enacted last year to provide W-2s to us earlier in the filing season.”


He believes those initiatives will help the IRS collect the correct amount of tax and encourage voluntary compliance. “The importance of voluntary compliance cannot be overstated,” said Koskinen. “A one-percentage-point increase in the level of voluntary compliance brings in about $30 billion in tax receipts. So it’s critical for us to do everything we can to maintain a high level of voluntary compliance with our tax laws, to help ensure taxpayer faith and fairness in the tax system. Those who don’t pay what they owe ultimately shift the tax burden to those who properly meet their tax obligations.”


Koskinen acknowledged that it is impossible to completely eliminate the tax gap. “Even with these and other efforts, I would note that it is not possible to eliminate the tax gap completely. In designing enforcement programs, we must take into account both the burden on taxpayers and the limits of our resources,” he said. “Getting to 100 percent tax compliance would require a huge increase in audits, and significantly greater third-party reporting and withholding than we have now. Realistically, that wouldn’t work, because the burden on taxpayers and the strain on IRS resources would be too great.”


Koskinen also warned that cuts in the IRS budget are likely to exacerbate the tax gap in reports to come. The IRS endured five years of budget cuts until it received an increase for this year earmarked toward improving taxpayer service and cybersecurity and fighting identity theft, but the agency has been forced to reduce its enforcement personnel.


“While we continue to pursue many different angles to address the tax gap, reductions to the IRS budget over the last several years have had a negative impact on these efforts,” he said. “Our funding is now $900 million below what it was in 2010, and we have 15,000 fewer full-time employees. Additional resources are essential for us to continue making progress in reducing the tax gap.”


He warned that the impact of the underfunding might not show up until the IRS releases a tax gap study for tax years 2011-2013 in 2019, and by then it might be too late. "I’ve tried to get Congress to understand we’re playing with fire when we underfund the agency so we provide less effective taxpayer service and less effective enforcement," he said.


The tax gap study basically aids the IRS and the federal government in planning for future tax revenues.


“Understanding the tax gap and its components helps government make better decisions about tax policy and the allocation of resources to tax administration,” said Koskinen. “Research on the extent of noncompliance and its sources helps the IRS devise cost-effective ways to increase compliance with our tax laws. For example, it helps us improve our audit-selection tools. We are committed to applying our limited resources where they are useful in reducing noncompliance while ensuring fairness, observing taxpayer rights, and reducing the burden on taxpayers who comply.”


Koskinen explained how the IRS needs time to process the tax collection numbers so the study does not take into account the impact of more recent initiatives such as matching of information from credit and debit card transactions on Form 1099-K information returns, as well as the various Offshore Voluntary Disclosure Programs and FATCA, the Foreign Account Tax Compliance Act, which was included as part of the HIRE Act of 2010.


“The voluntary disclosure program has operated primarily after this period,” he said in response to a question from Accounting Today. “About 55,000 people have paid us about $8 billion. To the extent that we wouldn’t have collected that $8 billion, that’s going to have an impact. We think with FATCA, it’s like the 1099-K. The fact that people now know we’ve had all this settlement with the Swiss banks and 220,000 foreign financial institutions are sharing with us information about Americans’ bank accounts, it should have an impact. We already can see a substantial increase in the filing of foreign asset-holding account reports, the FBARs as they’re called. We’ve tracked that once FATCA passed and once we were negotiating agreements with Swiss banks, we in some cases got twice as many information returns about people revealing foreign accounts that they held. I would think in the next report from ’11 to ’13 we would hope to see the impact of the 1099-K information returns and the impact of FATCA.”


In reaction to the tax gap report, Senate Finance Committee ranking member Ron Wyden, D-Ore., urged the IRS to put a system in place to identify the sources of corporate tax avoidance, evasion and noncompliance.

"It is absolutely unacceptable that the country has lost more than $400 billion dollars over the past ten years from corporations dodging their tax payments,” said Wyden in a statement. “This is money that could be put to good use shoring up critical programs such as Medicare. It’s time the IRS put an effective tracking and auditing system in place to locate this lost money.”




Saying No to Outside Agencies in Tax Collections



Not everyone is a fan of Congress’ plan to have the Internal Revenue Service use outside agencies to collect unpaid taxes. (See “Highway Bill Would Revive Private Collection of Tax Debts.”)


For starters, it’s been tried before, and failed – twice. Both efforts, from 1996-1997, and 2006-2009, lost money. And given the current atmosphere of high cybercrime, ID theft and tax refund fraud, it doesn’t make sense to give taxpayers’ personal data to third parties, according to Stephen Mankowski, executive vice president of the National Conference of CPA Practitioners and a partner at Bryn Mawr, Pa.-based E.P. Caine & Associates CPA LLC.


“We think it’s a bad idea,” said Mankowski, who recently testified at a hearing of the House Committee on Small Business on “Small Business and the Federal Government: How Cyber Attacks Threaten Both.” His prepared remarks described the risks faced by businesses in general and CPA firms in particular to guard against ID theft. During the questions that followed his presentation, he made the point that the collections issue added further risk to taxpayers whose personal data would be open to the collection agencies.


“The education we’ve been providing to our clients that the IRS won’t phone them or send out e-mails is going by the wayside,” he said. “So many of them have received scam phone calls and spoofing e-mails that we constantly remind them that the IRS doesn’t do these things – but now it will.”


“They’re still working out the parameters of the process,” he said. “They need to determine which accounts will get sent out to collectors, and what information on the taxpayers the collectors will have. There are a lot of gray areas to work through. For example, if you get a phone call from a collector will you have the right to say, ‘I’m not dealing with you, I want to deal with the IRS’?”


“Taxpayers may be required to deal with the collectors,” he said. “It can be a scary time, especially with ID theft rampant. People will have no idea who the collectors are. The outside collectors will have access to personal tax information, and the data to support what the IRS claims the taxpayer owes.”


“At least we got it on record that there were concerns from the ID theft perspective on the outsourcing of collections,” he added.


Mankowski noted that ID theft has been growing exponentially for years. “It seems that no matter what controls are put in place, criminals have better and more focused resources to circumvent these safeguards,” he said.


“All businesses are at risk, but CPA firms and tax practitioners are at a greater risk,” he noted. “The criminals are aware that the ‘prize’ for breaching tax practitioner systems could yield them not only names and Social Security numbers, but also several year of earnings as well as bank information and dates of birth.”


“In March 2015, one tax software vendor had its electronic processing systems compromised to the extent that the State of Minnesota and subsequently all states temporarily ceased accepting electronically filed returns from that vendor,” Mankowitz told the committee. “One positive result of this situation was the formation of the IRS Commissioner’s Security Summit, which initially included representatives from state governments, banking and the software community. This group approach was a positive signal from the IRS that the issues of identity theft and data security required a multifaceted approach to work at stemming the increases in data security and ID theft.”


The initial focus of the summit was addressing and stopping suspected fraudulent returns through the implementation of protocols to address issues with tax returns before processing and during the initial processing. “Before the creation of the Security Summit, the GAO estimated that during the 2014 filing season the IRS paid approximately $3.1 billion in fraudulent refunds while preventing $22.5 billion.”


While in its initial year the summit estimates that it has prevented in excess of three million fraudulent returns from being processed and refunds issued, many fraudulent returns are still getting through, Mankowski noted. “The summit has now been expanded to include tax practitioners.”


“Unfortunately, despite all of the efforts of the IRS and Congress to curb ID theft, often the cause is unscrupulous preparers that are often unregulated by any authority,” he said. “NCCPAP urges Congress to pass legislation to provide the IRS the necessary authority to regulate all tax preparers and require paid preparers to meet minimum standards.”




Art of Accounting: Stalemate between Parents and Children



Many family run businesses have parents and children who perform excellently together, and I have worked with many proud companies. However, occasionally there is a stumbling block, in that a parent and child cannot just get it together. What to do?


In many small businesses an underperforming employee hurts, and oft times there is a reluctance to get rid of them. They linger on, holding back the company. It is inevitable that they will be gone at some point, but that point seems to be delayed past when it should have been dealt with. Biting the bullet is necessary, and when the owners realize they are better off in the long run, they take the necessary step.


However, let’s suppose the employee is a son or daughter. Then it isn’t so easy, and could cause a war within the family. As an advisor I’ve learned that providing honest advice is a death knell and will lead to eventually losing the client, and I am comfortable with that. I don’t like it, but I feel it is important to do my job the best way I can and that the client is paying me for my advice, guidance and opinions.


With children, I see four ways to proceed: 1) help the parent get rid of the child, 2) the child to get rid of the parent, 3) bring in a professional nonfamily manager, or 4) sell the business.


I will deal with #4 first. Selling replaces the cash flow stream the business provides with a fixed sum that will throw off substantially lower cash flow. If the family members rely on the business for their livings, then this is not a viable way to proceed. #3 is a realistic approach when it is clear that neither the parent nor child could manage the business effectively. This requires an agreement on the lack of management skills or desire and a joint cooperation to defer to a professional nonfamily person running the business. It works. The downside I’ve seen occurs when the manager who is brought in turns out not to be the right person and is let go. The search process then restarts. It needs perspicacity and resolve. In one client I’ve seen this work fantastically on the third try, so once the process starts, it needs to be followed through. In another case, the search process showed that one of the children was capable of handling the reins, and this also worked out great.


#1 and #2 are harder. One has to step aside voluntarily or be bullied out. Either could step aside but usually only the parent could be bullied out. Reality indicates that the child or children take over a great deal of the day-to-day work from the parent and become indispensable to the daily operations, even if they do not have the talent to manage the entire business, be a leader and take it to the next level. The parent can’t push out the child, and usually will not want to even if that is the right decision, since then the parents have to go back to doing the type of work they got rid of for themselves when their child took it over. The parents also risk a fight with each other since the one not fully involved in the business does not want their child pushed out. False starts are made trying to get the child the management and leadership training needed, but the child is too busy working. Also, stubbornness sets in when the child wants an undeserved anointment as the “boss,” even if they are not ready. This creates massive family friction and unpleasantness.


I’ve seen these situations quite a few times. It works itself out when the child is given a personal assistant to take over many of the nonoperational functions they get involved in and operational people are added to relieve the business of the dependence on the daily work of the child. Concurrently the child recognizes the need for management training and starts reading books and articles on the topic, listens to recorded programs, attends seminars and industry conferences where such speakers are scheduled, and joins a peer coaching group such as Vistage. This is usually done during a “cease fire” and can take a couple of years. With the right attitudes, slow progress is made and one day it dawns on everyone that the child has earned the respect to have the head position.


As much experience as I have, I still become involved with situations that are “new.” The dynamics of people continually evolve and today’s young’uns are different than yesterday’s. Also, many parents with energy do not like to admit they are slowing down or need to step aside to some extent. Our job is to gain trust, offer suggestions, and project the situation if nothing is done versus making some changes. It also requires reasonableness from all parties and a desire to move the business forward.


Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People List. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, published by and “Managing Your Tax Season, Third Edition,” published by the AICPA. Ed also writes a twice-a-week blog addressing issues that clients have at Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at (732) 964-9329 or





PwC Whistleblower Needed a Smoke before Giving Up LuxLeaks Data



The man who uncovered secret Luxembourg deals that helped companies slash tax rates was actually looking for training documents when he stumbled upon the files on his computer at PricewaterhouseCoopers.


On the eve of his departure from the accounting firm in 2010, Antoine Deltour wasn’t fully aware of what he had discovered. He copied the folder and within half an hour had about 45,000 pages detailing confidential tax agreements that became known as the LuxLeaks.


Deltour’s discovery triggered the first in a wave of scandals over how thousands of international companies, including  Walt Disney Co., Microsoft Corp.’s Skype and PepsiCo Inc., moved money around the globe to avoid taxes. It also landed him in trouble after PwC sued and prosecutors charged him and two other men with theft and violation of business secrets.


 “I had discovered gradually the administrative practice of these deals,” Deltour, 30, told a three-judge panel at his trial in Luxembourg Tuesday. “The opportunity to have stumbled over this folder led me to copy it at that moment without a clear goal in mind,” knowing about the “sensitive and highly confidential nature of these files.”


‘Isolated, Alone’

Deltour “felt a bit surprised by the volume of the” files and “didn’t immediately do anything with this mass of information,” he told the court. He felt “isolated” and “alone” and unsure of who to turn to.


Months later he was contacted by journalist Edouard Perrin, who was working on a documentary about tax practices. The pair met only once, at Deltour’s home in Nancy, France, where Deltour said he needed a moment before handing over the files.


“Of course I hesitated,” Deltour told the judge. “I went to smoke a cigarette on the balcony to think a few moments about this.”


The resulting 2012 documentary by Perrin, who is also a defendant in the case, led to interest from the International Consortium of Investigative Journalists. The group put the documents online in 2014, triggering the LuxLeaks scandal.


Perrin, 44, another French citizen, was charged in April 2015 with being the accomplice of Raphael Halet, another ex-PwC staffer who is accused of stealing 16 corporate tax returns from the accounting firm and giving them to the journalist. Perrin is also accused of having urged Halet to search for specific documents, a charge both men rejected.


Perrin faced questions Tuesday about how exactly he had found Deltour and under what circumstances they met. A recurring theme in all three cases was whether at any point anyone received money. The answer was always no.


“It was clear to me that he had very strong convictions about the impact of these fiscal practices on the system in Luxembourg and other countries,” Perrin told the judge after being asked about Deltour. He realized how this was all about a “systematic plundering of fiscal resources” which was exactly the topic of the documentary he was working on.


Halet, who didn’t know Deltour, had access to tax files that were already in Perrin’s possession. Halet then said he could provide additional documents, and offered tax returns by big companies. Perrin said in his 2012 documentary, he only used files concerning Inc. and ArcelorMittal.


EU Probe

The LuxLeaks revelations sped beyond Luxembourg, causing European Union regulators to expand a tax subsidy probe and propose new laws to fight corporate tax dodging, while EU lawmakers created a special committee to probe fiscal deals across the 28-nation bloc.


Global attention has switched to the discovery of documents known as the Panama Papers. The same group of investigative journalists who published the LuxLeaks data published files from a Panamanian law firm that disclosed how billions of dollars are hidden in tax havens.




IRS Pressed to Crack Down on Hobby Losses



The Internal Revenue Service could be doing more to identify and examine taxpayers who may be deducting hobby losses to offset their actual income, according to a new report.


The report, from the Treasury Inspector General for Tax Administration, found that the IRS’s methods for identifying high-income taxpayers who may be offsetting their income with hobby losses do not maximize the use of all the relevant taxpayer information available to the IRS. When tax returns containing potential hobby losses are selected for audit, the examiners do not always address the hobby loss issues, according to the report.


TIGTA’s evaluation of IRS data from processing years 2011 through 2014 identified 9,699 individual returns from tax year 2013 that claimed a Schedule C loss of at least $20,000, gross receipts of $20,000 or less, and reported wages of at least $100,000. The taxpayers also reported losses in four consecutive years, for tax years 2010 to 2013. TIGTA’s review of a statistically valid sample of 100 tax returns determined that 88 of the returns showed an indication that the Schedule C businesses were not engaged in for profit. TIGTA estimates that 7,511 returns in the total sample population of taxpayers may have inappropriately used hobby loss expenses to reduce taxes by as much as $70.9 million for tax year 2013.


Section 183(a) of the Tax Code generally disallows business tax deductions for activities “not engaged in for profit” and Section 183(d), also referred to as the “hobby loss” provision, provides a presumption that most activities are engaged in for profit if the activity is profitable for three years of a consecutive five-year period (two of seven for breeding, training, showing, or racing of horses). 


A September 2007 TIGTA report found that approximately 1.2 million taxpayers in tax year 2005 may have used hobby losses to reduce their taxable incomes to potentially avoid paying $2.8 billion in taxes.  Identifying and auditing additional individual returns that improperly deduct hobby losses could help to reduce noncompliance in this area. TIGTA conducted a new audit to follow up on the 2007 report to determine whether the IRS was maximizing opportunities to identify the most significant Schedule C noncompliance.


“Taxpayers with significant amounts of income from other sources may attempt to reduce their tax liability by including losses from activities not engaged in for profit,” said TIGTA Inspector General J. Russell George in a statement. “The IRS needs to effectively identify these taxpayers in order to deter future non-compliance.”


TIGTA recommended that the IRS make use of research capabilities in its Small Business/Self-Employed Division to identify high-income individual returns with multiyear Schedule C losses and other factors that indicate the taxpayer may not have a profit or capital gain motive for the activity. The IRS should also emphasize the importance of the required filing checks in its preliminary determination of whether to pursue a hobby loss issue and provide tools to assist examiners in documenting their conclusion, the new report suggested.


In response to the report, IRS management agreed with TIGTA’s recommendations and plans to take corrective actions.


However, the IRS disagreed with TIGTA’s estimate of $70.9 million of additional tax revenue from the tax returns it sampled, given the nine criteria spelled out in under Section 183 of the Tax Code for determining whether a particular activity is engaged in for profit.


“It should be noted that the IRS, not the taxpayer, bears the burden of proving the taxpayer does not have a profit motive,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “Therefore, identifying returns with limited gross receipts, repetitive losses, and income from other sources, as used for your audit sample, is not sufficient to conclude that an activity was not engaged in for profit. A full examination of the individual’s books and records, addressing all nine factors outlined in the Treasury Regulations in light of the taxpayer’s specific facts and circumstances, must be conducted to draw an accurate conclusion.”




Art Buyers Face Scrutiny as New York Kicks Off Tax Probe



Art dealers and collectors are coming under increasing scrutiny for offenses from fraud to tax evasion, with New York’s top cop kicking off his own campaign against tax cheats on Tuesday.


Attorney General Eric Schneiderman announced two tax settlements—one with Aby Rosen, a New York real estate developer with a storied half-billion dollar art collection, and another with a sales executive at the prominent  Gagosian Gallery Inc. More are on the way, according to people familiar with the inquiries.


Rosen—a Manhattan developer known for displaying works by Picasso and Warhol at marquee properties including the Seagram Building and Lever House—agreed to pay $7 million related to claims that he avoided paying sales and use taxes on $80 million worth of fine art he had commissioned or bought since 2002.


In a separate deal, Schneiderman’s office said it had reached a settlement with Victoria Gelfand, a Gagosian Gallery director, who agreed to pay $210,000 in unpaid taxes on more than 30 pieces of art she had purchased through her privately owned companies.


The settlements don’t include admissions of wrongdoing.


Art Market

The accords are part of a wave of investigations into financial dealings in the robust art market. Soaring prices and secrecy in the art world—as well as the lack of regulation surrounding major transactions—have in recent years brought allegations that collectors and dealers have used prized works to launder money, dodge taxes and defraud purchasers and investors.


In China, Switzerland and across Europe, governments have placed increased scrutiny on the ways major art collections are used to hide ill-gotten wealth and avoid taxes. U.S. officials have recently taken an interest in the art world, with investigations touching on Swiss collector and dealer Yves Bouvier and Gagosian chief Larry Gagosian, both of whom have denied wrongdoing.


The New York Attorney General’s office said its inquiry was focused on the ways wealthy collectors and dealers structure their transactions to skirt state tax laws and deprive the state treasury of millions of revenue. People within the New York art world say the two settlements announced Tuesday are part of a more sweeping review by Schneiderman’s office.


Not Public

“There are a number of cases that are not even public that are going on right now,” said Gary Castle, a partner at accounting firm Anchin Block & Anchin in New York, who works with collectors, galleries and art foundations. “We are seeing notices and inquiries about specific transactions. We’ve seen them over the past year.”


The Attorney General’s office declined to comment on the breadth of its investigation but said it was determined to recover unpaid taxes wherever it can find evidence of abuse.


"We are committed to rooting out tax abuses wherever we find them, especially in the art world, where the difference can be hundreds of thousands—if not millions—of dollars in lost tax revenue,” Schneiderman said. “Law-abiding New Yorkers should not be stuck footing the bill for those who fail to pay their fair share.”


The settlements announced Tuesday both involve misuse of a provision of New York tax law that does not require sales or use tax on art work that is intended for resale.


The Attorney General said Rosen used two companies to buy and commission more than $80 million in artwork that he said wasn’t subject to tax because it was intended for resale. In fact, Schneiderman said, Rosen used the art pieces as if they were his personal possessions, displaying some in his home and using others to enhance his business.


Glass Lobby

Rosen is the co-founder of RFR Holding LLC, a real estate company that displays fine art throughout a portfolio that includes the W South Beach Hotel in Florida and the Gramercy Park Hotel, according to its website. The glass lobby of the firm’s Lever House serves as a contemporary gallery and has displayed works by Damien Hirst, Jeff Koons and other artists, according to the building’s website.


Among the 200 pieces Rosen agreed to pay taxes on are Andy Warhol’s “Howdy Doody,” which he bought for $866,500 in 2011; Roy Lichtenstein’s “Sock,” which he purchased for $5.25 million in 2011; and a Damien Hirst sculpture, "Virgin Mother," for which he paid $2.5 million.


Rosen said all the artwork he buys and shows at his properties is for sale.


“The law is behind on how art gets shown and distributed,” Rosen said in an interview. “The lobby is my gallery. The hotel is my gallery. I like transactions.”


Rosen said he had done nothing wrong.


“They are just looking for tax revenue, let’s be honest,” he said of the state. “But I want to move on. I have the money to pay.”


Gelfand’s two companies bought and sold more than 30 works for more than a total $1 million using certificates designating that they would be resold, Schneiderman said. From 2005 to 2013, the companies paid no sales or use tax—a tax on items put to personal use after saying they’d be resold—while displaying some of the pieces in Gelfand’s home, he said.


The Gagosian Gallery, where Gelfand works, isn’t accused of wrongdoing. Gelfand’s lawyer said she doesn’t “necessarily agree” with Schneiderman’s conclusions.


“These were purchases through a personal company and had nothing to do with the Gagosian Gallery,” said Jo Backer Laird, a lawyer who represents Gelfand. “The works were fully intended to be resold. In fact, efforts were made to resell them. Victoria settled because of the department’s position that works that are intended for resale but are exhibited in the home of the taxpayer are subject to sales and use tax.”




IRS Finds Money to Hire Hundreds More Enforcement Employees



The Internal Revenue Service plans to hire an additional 600 to 700 more enforcement employees in an effort to increase its audit rate.


The IRS found money within its existing budget to hire the additional employees after a series of budget cuts in recent years at the hands of Congress.


“As we continue to operate with a constrained budget, an area of concern for all of us remains the significant decline in the number of employees across the IRS,” wrote IRS Commissioner John Koskinen in a memo to employees on Wednesday. “With our budget down more than $900 million since 2010, there are unmet needs across the IRS and there have been few opportunities to hire new employees during the last six years.”


Congress did agree last December to add $290 million to the IRS’s budget for fiscal year 2016 (for a total of $11.23 billion) after five years of budget cuts, but the budget increases were earmarked toward improving taxpayer service, combatting identity theft, and improving cybersecurity, but not for auditing taxpayers.


Koskinen said that halfway through this fiscal year, the IRS has determined that it has enough resources to hire between 600 and 700 new employees in its enforcement areas. “Our first priority for hiring this year was to address taxpayer service,” he said. “We were able to add more than 1,000 W&I employees to our taxpayer phone lines after Congress provided $290 million specifically for taxpayer service, identity theft and cybersecurity.”


He noted that the decision to hire more enforcement personnel is based on several factors, including retirements. “A key element is the large number of retirements and attrition among enforcement employees,” said Koskinen. “In previous years, job losses across the agency have helped us absorb the funding cuts we have received, but left us with large gaps in various areas across the agency. This year, we’ve determined that we have the resources available to hire these employees as a result of the rate of attrition in enforcement and your continuing dedication to find efficiencies to help us with the budget.”


Koskinen pointed out that this will be the IRS’s first significant enforcement hiring in more than five years. “This is a good development for our tax system,” he said. “When you look at the IRS overall, every dollar invested in us returns at least $4 to the Treasury. The numbers are even higher when it involves enforcement. Each enforcement position typically returns almost $10 to the U.S. Treasury for every dollar spent—and in many instances, much more.”


The IRS’s audit rate has plummeted, particularly of business taxpayers, according to a recent analysis by Syracuse University’s Transactional Records Access Clearinghouse, or TRAC, which analyzed the IRS’s records from fiscal year 2010 through fiscal year 2015. TRAC found that IRS revenue agent hours aimed at corporations with $250 million or more in assets have declined 34 percent, while unreported taxes uncovered by the IRS that would otherwise have been lost to the government dropped 64 percent (see IRS Business Audits Plummet Due to Budget Cuts).


Individual taxpayers have also been spared in recent years. Another recent analysis by TRAC found that the odds of being criminally prosecuted by the IRS have fallen as a result of budget cuts at the hands of Congress, decreasing from 13.3 per million population in fiscal year 2013 to 9.2 per million in FY 2015 (see IRS Criminal Prosecutions Continue to Decline).


Koskinen said there would be two waves of job announcements. “The first will be in the next few weeks, with announcements being posted internally and externally for many entry-level positions, primarily in SB/SE [the IRS’s Small Business/Self-Employed division]. These revenue agents, revenue officers and other enforcement positions will be posted in locations around the country,” he said. “CI [Criminal Investigation] special agents and some positions in W&I [the IRS’s Wage and Investment division] and Chief Counsel will also be part of this initial wave of hiring. As we bring in more personnel, we anticipate a second wave of hiring coming later this year, providing employees with promotional opportunities for higher-level enforcement positions, including in LB&I [the Large Business and International Division], SB/SE, TE/GE [Tax Exempt and Government Entities division] as well as positions in Appeals. Employees in the second wave of hiring will assist with high-profile enforcement areas, including international tax issues, refund fraud and identity theft.”


Koskinen explained why the new hires are in the enforcement area. “Some of you may wonder why this hiring is in just specific enforcement areas and not elsewhere across the IRS,” he wrote. “That’s because our budget is allocated to specific areas, such as tax enforcement, taxpayer service, operations support and business systems modernization. Unlike a household budget, we cannot easily move money from one area to another. When funding is available in one area, we are required to spend it in that area. Clearly, we have unmet needs in other areas that we continue to work on and I continue to discuss that with Congress and in my public speeches. The Administration’s budget proposal for 2017, if adopted by Congress, would add more than 5,000 positions across the IRS, provide you with new tools to help you do your jobs and support our ongoing Future State initiatives.”

He said the IRS’s upcoming enforcement hiring, combined with its phone assistor hires, is an essential part of the agency’s Future State efforts. “To serve taxpayers and the nation’s tax system, we clearly need more people to improve the taxpayer experience as well as our employees’ experience,” said Koskinen. “At the end of the year, we believe we will be down more than 2,000 employees for the year, bringing our loss of employees to over 17,000 since 2010. More than 5,000 of those employees have been in our enforcement area. While adding 600 to 700 new enforcement hires will not replace those who have left, it will help fill key gaps in our enforcement workforce created by years of attrition and will provide existing employees promotion and developmental opportunities, including serving as mentors and instructors for the new staff.”


The extra hiring should be an important step in the right direction, according to Koskinen. “Adding employees—combined with your continued hard work and dedication—is a sound investment for the nation,” he wrote. “Thank you all for your efforts, and I wish you a very happy Public Service Recognition Week.”




Understanding Distributions from Traditional IRAs and Taxes at Death



Many Individual Retirement Account holders die without having consumed the account balances; therefore, beneficiaries will be entitled to the balance.


These distributions are reportable as ordinary income. Also, the account’s value is part of the decedent’s gross estate, making these IRAs subject to income and estate taxes upon death.

Here are some of the rules and options available to IRA beneficiaries:


Surviving Spouse

A surviving spouse can rollover the deceased’s account to his or her own IRA. Often, a surviving spouse will elect this option to defer income taxes. A spouse can opt for a partial distribution rolling over the account balance into his or her own IRA.


Non-Spouse Beneficiary

Non-spouse beneficiaries, such as children, cannot roll over the decedent’s IRA. If the decedent was taking required minimum distributions, then the non-spouse beneficiary can: (1) take a lump sum distribution; (2) set up an “inherited” IRA and take required minimum distributions based upon his or her own age; or (3) continue taking the required minimum distributions based upon the decedent’s age.


Although the RMD rules do not apply to Roth IRAs during the accountholder’s lifetime, they do apply to after-death distributions.


If the decedent died prior to the RMDs requirement age, the non-spouse beneficiary has a fourth option. The IRA could be distributed to the beneficiary within five years.


A Non-Spouse Beneficiary Hypothetical

Let’s assume Bill died at age 72, owning an IRA valued at $1 million. He named his two adult children, Sam and Diane, as beneficiaries. What options do they have? What are the tax results?


1. They can each elect a lump sum distribution. Each would report $500,000 as income and pay an income tax based on their marginal income tax rates.


However, in the event Bill had an estate subject to estate tax, the estate tax attributed to the IRA would be deductible.


2. In lieu of lump sum distributions, they would have up until the year after death on December 31 to set up one or two separate “inherited” or “stretch” IRAs. That year, and each thereafter, they would have to take a minimum distribution based upon their ages and the account’s value at the end of the prior year.


3. They could continue taking IRA distributions based on Bill’s age, as though he survived. This option usually doesn’t make sense since the beneficiary could always take a distribution greater than the minimal amount.


Now, let’s suppose that Bill died prior to reaching the RMDs requirement age of 70 ½. Besides the above options, a beneficiary has a five-year deferral option. Bill’s IRA beneficiaries could take partial distributions over the five-year period, or wait until the period is up and take a lump sum account payment. However, if the beneficiary wants to utilize the stretch option, he or she must make an election by December 31 of the year following death.


In estates where estate tax liability is due, whether or not the beneficiary may want to elect a stretch option may depend on whether there are other assets to pay the tax.


Ernie Guerriero, CLU, ChFC, CEBS, CPCU, CPC, CMS, AIF, is director and head of qualified plan marketing for the Business Resource Center for Advanced Markets at The Guardian Life Insurance Company of America, where he oversees the qualified plan department that provides sales, marketing, and technical support on qualified retirement plans.





Source of Panama Leak Offers Authorities Help in Prosecutions



The anonymous whistle-blower who leaked millions of Panamanian legal documents related to secret shell companies offered to help authorities investigate and prosecute criminal cases that might arise from them in exchange for immunity.


The whistle-blower, who is identified only as “John Doe,” made the offer in a sweeping manifesto entitled “The Revolution Will Be Digitized,” which was published Friday in Suddeutsche Zeitung, the German newspaper that received the 12 million or so documents last year.


In the 1,800-word essay, the writer denied published reports that tied the leak to an intelligence agency or government. The motivation for releasing the documents from the law firm Mossack Fonseca was exasperation about the “systemic corruption” that has allowed the problem of income inequality to worsen, according to the essay.


 “Shell companies are often associated with the crime of tax evasion, but the Panama Papers show beyond a shadow of a doubt that although shell companies are not illegal by definition, they are used to carry out a wide array of serious crimes that go beyond evading taxes,” the writer said. “I decided to expose Mossack Fonseca because I thought its founders, employees and clients should have to answer for their roles in these crimes, only some of which have come to light thus far. It will take years, possibly decades, for the full extent of the firm’s sordid acts to become known.”


A spokeswoman at Mossack Fonseca declined to comment Friday. After an initial round of articles based on the documents, the law firm posted a statement on its website saying its work was being misrepresented; that it conducts due diligence on its clients on an ongoing basis; that it denies services to clients who don’t comply with information requests or have been sanctioned by authorities; and that it cooperates with authorities in investigations.


The manifesto was also published on the website of the International Consortium of Investigative Journalists, the Washington-based nonprofit that worked with the German newspaper to publish stories about the alleged abuses revealed by the leaked documents. Stories focused on how the structures allowed the wealthy and powerful to conceal assets and, in some cases, hide criminal activity like money laundering and tax evasion or hide artistic works of disputed ownership.


More Planned

The journalism group has said on its website that it plans to release on Monday a searchable database on “more than 200,000 offshore entities” that are part of its investigation. Mossack Fonseca on Friday said it sent the group a cease-and-desist letter urging it to not publish any more confidential information from the leak.

Release of the records created political upheaval in Iceland, where the Prime Minister was forced to resign after it was revealed that he and his wife held hidden assets offshore and also caused political embarrassment for heads of state in Russia and the U.K.


The whistle-blower said that the information contained in the documents could lead to “thousands of prosecutions” and offered to work with law enforcement officials to build cases. The essay cited the cases of National Security Agency whistle-blower Edward Snowden, who lives in exile in Russia, and Bradley Birkenfeld, who shared information about UBS Group AG, but then served a prison sentence before being released and given a monetary award from the IRS for providing information.


“Legitimate whistle-blowers who expose unquestionable wrongdoing, whether insiders or outsiders, deserve immunity from government retribution, full stop,” wrote “John Doe.” “Until governments codify legal protections for whistle-blowers into law, enforcement agencies will simply have to depend on their own resources or on-going global media coverage for documents.”


Using language that was by turns legalistic and revolutionary, the whistle-blower said that various institutions had failed in their duty to prevent the wealthy from hiding their riches and evading taxes—including banks, legal systems, elected officials, financial regulators, tax authorities and the news media.


“The collective impact of these failures has been a complete erosion of ethical standards, ultimately leading to a novel system we still call Capitalism, but which is tantamount to economic slavery,” the essay said. “In this system—our system—the slaves are unaware both of their status and of their masters, who exist in a world apart where the intangible shackles are carefully hidden amongst reams of unreachable legalese.”


Sought Uproar

As a result, the whistle-blower released the documents hoping that they would incite enough public uproar to spur changes in banking regulations and international law, according to the essay. While the debate ignited by the documents is heartening, the whistle-blower said, much more is needed.


The European Commission, British Parliament and U.S. Congress should move swiftly to end lax disclosure requirements that make it easy for the wealthy to hide their riches in shell companies, the essay said. While the opposition to change would no doubt be fierce, the whistle-blower wrote, the danger of leaving the issue unaddressed was greater.


“Historians can easily recount how issues involving taxation and imbalances of power have led to revolutions in ages past,” the essay said. “Then, military might was necessary to subjugate peoples, whereas now, curtailing information access is just as effective or more so, since the act is often invisible. Yet we live in a time of inexpensive, limitless digital storage and fast internet connections that transcend national boundaries. It doesn’t take much to connect the dots: from start to finish, inception to global media distribution, the next revolution will be digitized."


“Or perhaps,” the essay said, “it has already begun."




Obama Asks Congress for Crackdown on International Tax Evasion



President Barack Obama said Congress should pass legislation to rebuild U.S. infrastructure, raise the minimum wage and crack down on money laundering and tax evasion, after his administration released a plan to make it harder for people to hide money in the U.S.


“In recent months we’ve seen just how big a problem corruption and tax evasion have become around the globe," Obama said Friday at the White House. Even legal methods of avoiding taxes are "still unfair and bad for the economy," he said.


On Thursday, the administration announced plans to capitalize on global concern about financial secrecy in offshore shell companies prompted by a massive document leak, the so-called Panama Papers, by proposing changes in U.S. laws and regulations to increase transparency and decrease abuses of the banking system.


The Labor Department on Friday said that U.S. employers added the fewest jobs in seven months in April amid subdued economic growth. Obama considers the economic recovery since he became president in 2009 to be the central achievement of his presidency and often highlights job growth. Employers added 160,000 jobs in April, lower than the 200,000 median forecast in a Bloomberg survey of economists but a record 74th consecutive month of gains.


“If the Republican Congress joined us to take some steps that are common sense, we could put some additional wind behind the backs of hardworking Americans,” Obama said.


The president and his surrogates have downplayed signs of a slowdown in the U.S. economy, instead blaming Congress for blocking proposals the administration says would spur more economic growth. Those include spending more money on infrastructure improvements, which Obama said would create jobs as well as “huge multiplier effects across the economy,” and a minimum wage increase.


Republican congressional leaders have evinced no interest in either proposal.


The administration’s effort to boost financial transparency in the U.S. includes proposed legislation to require companies to disclose the names of owners of any new entities they create. Obama said regulatory changes announced Thursday would “make sure foreigners cannot hide inside anonymous shell companies formed within the United States.”


He also called on the Senate to stop blocking international tax treaties, naming Senator Rand Paul of Kentucky in particular. The Republican has “been a little bit quirky on this issue,” Obama said.




Obama Intensifies Push for More Onshore Ownership Disclosure



President Barack Obama renewed his push to make it harder for people to hide money in the U.S., jumping on momentum created by the release of leaked Panama legal documents to pressure Congress on proposals that have been languishing for years.


The government will send proposed legislation to lawmakers that would require companies to name the owners of any new entities they create and would expand the Justice Department’s power to subpoena information in some corruption cases.


It also on Thursday finalized a rule that will require financial institutions to identify the account holders hidden behind shell companies, while proposing new rules to eliminate a loophole that allows some foreign-owned companies to hide assets in the U.S.


 “We’re saying to those financial institutions you’ve got to step up and get that information,” Obama told reporters Friday at the White House, regarding the finalized Treasury rule.


The leak of more than 11 million documents from a Panama law firm last month put the spotlight on offshore companies used to shield owners’ identities and sparked an international push for transparency. While U.S. officials said Thursday’s proposals weren’t in response to the Panama documents, the leak highlighted the need for more to be done to combat money laundering and tax evasion.


The U.S. Treasury Department announced a proposed rule that would require certain foreign-owned companies to get employer identification numbers from the Internal Revenue Service, something that hadn’t been required. The rule would allow the IRS to determine if the companies owed U.S. taxes and to share information with other jurisdictions. Officials also repeated the administration’s call for Congress to pass legislation that would require financial institutions to report U.S. accounts held by foreign persons to overseas regulators, bringing the U.S. in line with other countries.


“We’re not going to be able to complete this job unless Congress acts as well,” Obama said Friday. “I’m calling on Congress to pass legislation to require all companies” created in the U.S. to report information about their ownership to the U.S. government.


House Speaker Paul Ryan’s office referred questions to the House Financial Services Committee, Doug Andres, a spokesman for Ryan of Wisconsin, said in an e-mail. Sarah Rozier, a spokeswoman for the panel, didn’t immediately respond to a request for comment. Senate Majority Leader Mitch McConnell of Kentucky will review the proposal, said Antonia Ferrier, a spokeswoman.


Senate Finance Committee Chairman Orrin Hatch, a Utah Republican, will also study the proposals, said Julia Lawless, a spokeswoman. “While there is certainly a bipartisan desire to craft effective policies to prevent tax cheats from gaming the system, details matter,” she said.

Collecting Names

In its final language for the rule requiring banks to collect the names behind corporate accounts, the administration made tweaks to extend its implementation period and allow more exemptions. The so-called customer due-diligence rule left at 25 percent the level of ownership that triggers disclosure.


The changes don’t go as far as advocates want. Under the rule, would-be money launderers could structure companies with multiple owners, so each falls below the 25 percent threshold. They could then put in place managers and use their names to satisfy the rule, while withholding true owners’ identities, said Stefanie Ostfeld, acting head of the U.S. office for Global Witness, a non-profit group that presses for global financial transparency.


“There’s still loopholes in it and it’s possible to provide the information, to be in compliance, without providing the true beneficial owner,” she said.


For years, Congress and the Treasury have floated measures that would require greater disclosure of the beneficial owners of companies registered in the U.S. Those efforts escalated after the attacks of Sept. 11, 2001, as homeland security officials warned that onshore shell companies could be used to finance terrorist groups. But opposition by the U.S. Chamber of Commerce and the American Bar Association—and lobbying by the National Association of Secretaries of State—thwarted most of those calls for more disclosure, according to Heather Lowe, director of Global Financial Integrity, a group that advocates for greater business transparency.


“The primary opposition was from the secretaries of state, who didn’t want to lose business,” she said. “And politicians don’t want to alienate the secretaries of state because they are the ones who run the elections.”


Some other countries have also been pushing for greater transparency. The European Union last year passed a directive requiring member states to set up registries to collect companies’ real owners -- an effort to crack down on money laundering and terrorist financing. But the EU effectively left it up to each country to decide if its registry should be fully public.


If Congress passed legislation creating a central registry to list the beneficial owners of shell companies, the impact could be felt across multiple industries. Swaths of high-end real estate in the U.S., as well as some art, are purchased through companies that shield the identities of the true owners. The Treasury said it is temporarily requiring ownership disclosure for all-cash purchases of high-value real estate in New York and Miami.


The Treasury also pushed Congress for action on tax-information sharing. Nearly 100 jurisdictions around the world have agreed since 2014 to impose new disclosure standards for bank accounts and other investments requiring that information is shared with regulators in their home countries regardless of where the account is held. But the most prominent holdout is the U.S., which along with Panama has not signed onto the standard.

Obama pressed Congress to approve eight pending tax treaties, singling out Senator Rand Paul, a Kentucky Republican, for blocking them.


“We’re going to need to cooperate internationally because tax avoidance” and money laundering take place globally, Obama said. “If we can’t cooperate with other countries, it makes it harder to crack down.”


Account Disclosure

A 2010 U.S. law, the Foreign Account Tax Compliance Act, or FATCA, requires financial firms to disclose foreign accounts held by U.S. citizens and report them to the IRS. But the law doesn’t require disclosure of U.S. bank accounts held by foreigners to regulators overseas. As a result, financial planners are advising customers seeking confidentiality to move accounts out of traditional secrecy jurisdictions like Switzerland and Bermuda and into the U.S., as reported by Bloomberg in January.


“Currently, the United States does not provide its FATCA partners with the same information about U.S. financial institutions that foreign financial institutions must provide the IRS,” Treasury Secretary Jacob J. Lew said in a letterto Ryan. “Reciprocity with other jurisdictions is a key component of any successful strategy for combating international tax evasion.”


The Justice Department proposed a series of legislative changes that it said would help boost efforts to pursue kleptocrats and speed up the ability to gain evidence located in other countries.


One proposal would let the agency seek evidence in money laundering investigations through the use of civil administrative subpoenas, as opposed to a criminal grand jury. Leslie Caldwell, head of the Justice Department’s criminal division, said those subpoenas would be used in civil cases, such as those involving funds stolen by leaders of corrupt countries.


The Justice Department also wants to increase the time foreign governments have to initiate a forfeiture case when seeking assets located in the U.S.—from 30 days to 90 days.




What You Need to Know if You Get a Letter in the Mail from the IRS


Each year, the IRS mails millions of notices and letters to taxpayers for a variety of reasons. If you receive correspondence from us:

  1. Don’t panic. You can usually deal with a notice simply by responding to it.
  2. Most IRS notices are about federal tax returns or tax accounts. Each notice has specific instructions, so read your notice carefully because it will tell you what you need to do.
  3. Your notice will likely be about changes to your account, taxes you owe or a payment request. However, your notice may ask you for more information about a specific issue.
  4. If your notice says that the IRS changed or corrected your tax return, review the information and compare it with your original return.
  5. If you agree with the notice, you usually don’t need to reply unless it gives you other instructions or you need to make a payment.
  6. If you don’t agree with the notice, you need to respond. Write a letter that explains why you disagree, and include information and documents you want the IRS to consider. Mail your response with the contact stub at the bottom of the notice to the address on the contact stub. Allow at least 30 days for a response.
  7. For most notices, you won’t need to call or visit a walk-in center. If you have questions, call the phone number in the upper right-hand corner of the notice. Be sure to have a copy of your tax return and the notice with you when you call.
  8. Always keep copies of any notices you receive with your tax records.
  9. Be alert for tax scams. The IRS sends letters and notices by mail. We don’t contact people by email or social media to ask for personal or financial information. If you owe tax, you have several payment options. The IRS won’t demand that you pay a certain way, such as prepaid debit or credit card.




Juggling Family Wealth Management Is No Trick


Preserving and managing family wealth requires addressing a number of major issues. These include saving for your children’s education and funding your own retirement. Juggling these competing demands is no trick. Rather, it requires a carefully devised and maintained family wealth management plan.


Start with the basics

First, a good estate plan can help ensure that, in the event of your death, your children will be taken care of and, if your estate is large, that they won’t lose a substantial portion of their inheritances to estate taxes. It can also guarantee that your assets will be passed along to your heirs according to your wishes.


Second, life insurance is essential. The right coverage can provide the liquidity needed to repay debts, support your children and others who depend on you financially, and pay estate taxes.


Prepare for the challenge

Most families face two long-term wealth management challenges: funding retirement and paying for college education. While both issues can be daunting, don’t sacrifice saving for your own retirement to finance your child’s education. Scholarships, grants, loans and work-study may help pay for college — but only you can fund your retirement.


Uncle Sam has provided several education incentives that are worth checking out, including tax credits and deductions for qualifying expenses and tax-advantaged savings opportunities such as 529 plans and Education Savings Accounts (ESAs). Because of income limits and phaseouts, many higher-income families won’t benefit from some of these tax breaks. But, your children (or your parents, in the case of contributing to an ESA) may be able to take advantage of them.


Give assets wisely

Giving money, investments or other assets to your children or other family members can save future income tax and be a sound estate planning strategy as well. You can currently give up to $14,000 per year per individual ($28,000 if married) without incurring gift tax or using your lifetime gift tax exemption. Depending on the number of children and grandchildren you have, and how many years you continue this gifting program, it can really add up.


By gifting assets that produce income or that you expect to appreciate, you not only remove assets from your taxable estate, but also shift income and future appreciation to people who may be in lower tax brackets.


Also consider using trusts to facilitate your gifting plan. The benefit of trusts is that they can ensure funds are used in the manner you intended and can protect the assets from your loved ones’ creditors.


Overcome the complexities

Creating a comprehensive plan for family wealth management and following through with it may not be simple — but you owe it to yourself and your family. We can help you overcome the complexities and manage your tax burden.


Sidebar: Charitable giving’s place in family wealth management

Do charitable gifts have a place in family wealth management? Absolutely. Properly made gifts can avoid gift and estate taxes, while possibly qualifying for an income tax deduction. Consider a charitable trust that allows you to give income-producing assets to charity, but keep the income for life — or for the charity to receive the earnings and the assets to later pass to your heirs. These are just two examples; there are more ways to use trusts to accomplish your charitable goals.





Need A Do-over? Amend Your Tax Return


Like many taxpayers, you probably feel a sense of relief after filing your tax return. But that feeling can change if, soon after, you realize you’ve overlooked a key detail or received additional information that should have been considered. In such instances, you may want (or need) to amend your return.


Typically, an amended return — Form 1040X, to be exact — must be filed within three years from the date you filed the original tax return or within two years of the date the applicable tax was paid (whichever is later). Your choice of timing should depend on whether you expect a refund or a bill.


If claiming an additional refund, you should typically wait until you’ve received your original refund. Then cash or deposit the first refund check while waiting for the second. If you owe additional dollars, file the amended return and pay the tax immediately to minimize interest and penalties.


Bear in mind that, as of this writing, the IRS doesn’t offer amended returns via e-file. You can, however, track your amended return electronically. The IRS now offers an automated status-tracking tool called “Where’s My Amended Return?” at


If you think an amended return is needed or warranted, please give us a call. We will be glad to help.







Cleaning Up the Mess Left by DIY Tax Software



More and more taxpayers are turning towards do-it-yourself tax software to prepare and file business and individual income tax returns.


With every passing year, our offices receive an ever-increasing number of calls asking for help fixing previously self-filed returns. Consumers of these products are beginning to treat tax preparation software as virtual tax return preparers. As the IRS has focused on increased regulation for paid providers of tax return services, I believe the Service’s scope should include tax preparation software providers as well.


The security of taxpayer accounts and personal information has been a top priority of the IRS for e-file providers since the electronic filing program’s inception. Publication 4557, Safeguarding Taxpayer Data, and Publication 4600, Safeguarding Taxpayer Information were published to provide guidance and best practices. However, in 2015, Intuit’s TurboTax systems were reportedly hacked, leading to many fraudulent returns being filed without the taxpayers’ knowledge.


 [Editor's Note: According to an Intuit spokesperson, based on an internal analysis and validation from an outside third party, the company determined that there was no evidence of a data breach. Last year, Intuit reported it saw an increased occurrence of stolen identity refund fraud where a fraudster acquires personal information/credentials outside of the tax prep process and uses that info to file a fraudulent return.]


The repercussions of the fraudulent returns left fraud victims having to manually file their tax returns, file police reports detailing possible identity theft, and monitor their credit reports for any other signs of their information being used. Despite the security breach, no penalties were imposed against Intuit. The company was only instructed to prepare a list of changes to reduce tax fraud by the next filing year.


Tax preparation software providers need to apply the same strict data-handling guidelines to self-preparation tax software as do the professional tax preparers.


Another significant issue with do-it-yourself software is the consumer’s reliance on it to do the impossible and apply the voluminous amount of tax law to their individual scenario. Without a firm grasp of the ever-changing tax law, individuals are relying heavily on the automated prompts within the system to help guide them, further creating the illusion that preparing and filing income tax returns is simple in all cases.


Granted, a tax return may be simple, and the software utilized may be sufficient, in some cases. However, even in straightforward scenarios, costly mistakes can and do happen. A client of ours, for example, forgot to enter the city tax that was withheld from them, costing them approximately $4,000 while self-preparing a very simple return. Additionally, what most fail to realize about tax audits and proceedings is that the burden of proof, unlike the legal system, fall on the taxpayer to show the reason why certain deductions were taken or key information was omitted from the return. Consumers of these tax products need to be reminded that relying on prompts from the software does not constitute a viable defense.


Another case involved both a business and a personal income tax return, and arose from the taxpayer’s limited knowledge of Schedule K-1s, the IRS’s ability to cross reference documents, misclassifying large expenses, and misrepresented 1099 filings. The taxpayer had not included Schedule K-1’s on his personal return after preparing his own business’s return. The taxpayer failed to realize that the IRS operates on a matching system in which it matches third-party filings with an individual’s return. The mismatch of the K-1 that was present on the S corporation return, but not found on the client’s 1040, triggered a correspondence audit. In yet another example, the client incurred over $161,000 worth of penalties and interest over multiple years, and had to spend over $30,000 in accounting fees over a number of years, working with the IRS and states, to remove the incorrect penalties and amend six years of business and individual tax filings.


The cause? The client used self-preparation tax and payroll software, and assumed their company was correctly filing partnership and payroll forms for years. In fact, the client had been sending in payroll tax deposits, but not filing all of the forms consistently, omitting filing for the periods where no payroll tax was due. The client was unaware of a requirement that mandated taxpayers to file zero payroll forms. Since the IRS had not received zero payroll forms, the tax liability from prior periods was assumed for the periods with missing tax forms. Aside from missing forms, the client was also unaware that an employee had a certain type of visa status that exempted an employer from certain payroll taxes. Presenting this information helped to show that a payroll tax overpayment existed on the account, helping to reduce their penalties and interest.


Taxpayers should be made aware that the software they are using and relying on to prepare and

file their taxes may not adequately report their tax liability to comply with tax laws. Furthermore, taxpayers may inadvertently be leaving more of their money on the table due to the automated software. ABC News recently showed a segmenton how one family’s refund amounts differed when using do-it-yourself tax software, a storefront tax preparer and a tax accountant. Their highest refund was calculated by the tax accountant. The family admitted to having overlooked a key item within the tax software, which the tax accountant had found for them. By engaging in an open dialogue with a tax professional, the family was able to more than double their tax refund amount.


Until the IRS requires all tax preparation software providers be held to the same standards of paid tax professionals, we must continue to advocate for our clients and those burned by do-it-yourself software. It is up to us to remind taxpayers to seek professional help with their tax issues to avoid costly mistakes. The services of tax professionals may seem more expensive upfront than do-it-yourself tax software at first glance. To overcome this obstacle, it is important to showcase the value in choosing tax professionals who not only provide peace of mind, quality of service, and thorough investigation and resolution of their tax issues, but also perform in-depth tax research and perform representation services. As tax professionals, we need to keep the dialogue open with our clients and those attempting to navigate through tax laws on their own, and remind them of the value we bring.


Greg Freyman, CPA, CGMA, is the CEO and managing partner at Freyman CPA, P.C. in Westwood, N.J. He holds a bachelor’s degree in accounting from City University of New York – Brooklyn College and is a certified AICPA Chartered Global Management Accountant. He has been featured in Crain’s NY Business. He stays up to date on the latest developments in tax and accounting rules and regulations and is proficient in Spanish and Russian.




Getting Advance Payments of the Premium Tax Credit? Remember to Report Changes in Circumstances


If you purchased 2016 health care coverage through the Health Insurance Marketplace, you may have chosen to have advance payments of the premium tax credit paid to your  insurance company to lower your monthly premiums. If this is the case, it’s important to let your Marketplace know about significant life events, known as changes in circumstances.


These changes – such as those to your income or family size – may affect your premium tax credit. Reporting the changes will help you avoid getting too much or too little advance payment of the premium tax credit.  Getting too little could mean missing out on premium assistance to reduce your monthly premiums. Getting too much means you may owe additional money or get a smaller refund when you file your taxes. If your income for the year turns out to be too high to receive the premium tax credit, you will have to repay all of the payments that were made on your behalf, with no limitation.   Changes in circumstances that you should report to the Marketplace include:

  • an increase or decrease in your income
  • marriage or divorce
  • the birth or adoption of a child
  • starting a job with health insurance
  • gaining or losing your eligibility for other health care coverage
  • changing your residence


Changes in circumstances may qualify you for a special enrollment period to change or get insurance through the Marketplace. In most cases, if you qualify for the special enrollment period, you will have sixty days to enroll following the change in circumstances. You can find Information about special enrollment at


The Premium Tax Credit Change Estimator can help you estimate how your premium tax credit will change if your income or family size changes during the year. This estimator tool does not report changes in circumstances to your Marketplace. To report changes and to adjust the amount of your advance payments of the premium tax credit you must contact your Health Insurance Marketplace.




Panama Papers Highlight Taxpayers' Risk



Although the initial flurry of publicity surrounding the leak of the Panama Papers has subsided somewhat, the release serves as a reminder that there’s a real problem for taxpayers still holding offshore accounts that they haven’t reported, according to Ivan Golden, an attorney at Schiff Hardin LLP.


“They’re at serious risk of discovery and should carefully consider disclosing their accounts before it is too late,” he said.


And while few American taxpayers were reportedly named in the Panama Papers, most experts believe the release, from one Panamanian law firm, is just the tip of the iceberg and that further information on “secret” offshore accounts will undoubtedly be forthcoming. The Justice Department is continuing to investigate offshore tax evasion in jurisdictions beyond Switzerland using information gathered in the Swiss Bank Program.


Tax preparers should be aware of the approaching FBAR filing deadline of June 30. Not only are taxpayers required to declare any foreign accounts and report the income from them on their tax returns, they also must file the FBAR (Foreign Bank and Financial Accounts Report) form with the Financial Crimes Enforcement Network. Preparers that know of an overseas account who fail to include it on their client’s return could be liable for criminal penalties, as well as penalties for filing an incorrect return.


The penalties on the individual taxpayer can be enormous, reaching the greater of $100,000 or the total amount in the account for willful violations. Penalties are cumulative, with each year of noncompliance subjecting the taxpayer to additional penalties.


The IRS’s Offshore Voluntary Disclosure Program may entitle the taxpayer to lesser penalties. “Taxpayers are almost always going to get better treatment if they come forward voluntarily as opposed to having their accounts discovered by the government,” said Golden.


Although the terms of the OVDP have gotten less favorable now than when they were introduced in 2009, the good news is that it is still possible to make a disclosure on relatively favorable terms, Golden indicated. “The bad news is that the IRS has hinted that taxpayers’ ability to disclose offshore accounts while paying relatively modest penalties may not last forever.”


“It’s interesting that over time the terms of the OVDP have gotten less favorable. They had a six-year look-back and a 20 percent penalty based on the aggregate high value of the offshore account,” Golden noted. “Now it’s an eight-year look-back and a 27.5 percent miscellaneous penalty, or as much as 50 percent if the bank is already under investigation.”


For less culpable, or non-willful, taxpayers, streamlined procedures exist under which the taxpayer files three years of delinquent returns and six years of FBARs, with a miscellaneous penalty of at most 5 percent of the highest aggregate balance in their offshore accounts, according to Golden.


“Since the OVDP’s introduction in 2009, the IRS has received more than 54,000 voluntary disclosures and more than 30,000 streamlined disclosures and has collected more than $8 billion in tax in tax, penalties and interest,” noted Golden. “U.S. taxpayers, including those who live overseas, who still have undisclosed foreign income, assets or accounts should carefully consider making a voluntary disclosure while they are still able to do so,” he said.




'Sharing Economy' Gets Little Tax Guidance



Approximately 69 percent of entrepreneurs who participate in so-called “sharing economy” services such as Uber, Lyft and Airbnb received absolutely no tax guidance from the companies they work with, according to a new survey.


The survey, from the National Association for the Self-Employed, pointed to the importance of educating shared-economy entrepreneurs and merchants who participate in services like Etsy about the fact that they are operating a self-employed, small business and need to understand taxes.


Over 90 percent of the survey respondents said they use a tax professional or tax software to help prepare their taxes. Of those who used a professional tax preparer or software, over 50 percent paid over $150 to do their taxes. The results were evenly split between those who set aside money to pay their 2015 tax bills and those who did not.


 “Those participating in the sharing economy are self-employed, small business owners, whether they like it or not,” said NASE vice president for government relations and public affairs Katie Vlietstra in a statement. “They are operating a legitimate business and are subject to a specific set of tax obligations, business regulations and reporting requirements. Regardless if these entrepreneurs are only participating in the sharing economy for a fixed amount of time, they are still operating a self-employed, small business. Even working a few hours on the weekend to pay off some outstanding debt still has financial and tax responsibilities that is important for them to fully understand.”


The survey was sent in March to more than 40,000 small businesses and received over 500 responses, mainly from the self-employed, about their participation in the sharing economy.

“As this new and important small business demographic grows, it is important that the tax code evolves along with the sharing economy to accurately reflect the taxable income of those operating in it,” said Caroline Bruckner, managing director of American University’s Kogod Tax Policy Center. “For instance, the fact that those in the sharing economy did not receive any tax guidance suggests that unless those participating use professional tax preparers, they run the risk of being shortchanged by the tax code and not fully understanding the financial and tax implications of running a shared economy business.”


Kogod plans to release a report later this month analyzing the tax compliance challenges faced by small businesses operating in the sharing economy and how that affects the IRS’s ability to fairly administer the tax code.


The survey asked small business owners about their current participation in the sharing economy and found that only 22 percent of the respondents earned money from the sharing economy in 2015. While more than 4 percent of respondents spent more than 35 hours per week offering services via sharing economy platforms, an overwhelming 72.5 percent majority spent less the 10 hours a week. Nearly three-quarters of the respondents (74 percent) who said they were participating in the sharing economy earned between $1,000 and $5,000 through the shared economy platform or app in 2015. A 53 percent majority of respondents said they worked full-time (or nearly full-time) on another job outside of any participation in the shared economy.


According to the latest U.S. Census figures from 2013, small, self-employed and micro-businesses (with nine or fewer employees) account for over 78 percent of the overall small business community, representing more than 27.5 million entities nationwide. The self-employed have been growing faster than any other small business group over the past 10 years.




I Saw Trump's Tax Returns. You Should, Too.



In January, Donald Trump had this to say when he was asked about whether he would release his tax returns: “I have very big returns, as you know, and I have everything all approved and very beautiful and we’ll be working that over in the next period of time.”


Yet he held off on releasing his returns. And on Tuesday night, the presumptive Republican presidential nominee seemed to close the door for good on the matter. He told the Associated Press that he wouldn’t release his returns prior to the November elections unless what he described as an Internal Revenue Service audit of his finances was complete.


“There’s nothing to learn from them,” Trump said of his tax returns.


That prompted Mitt Romney to take Trump to task late Wednesday afternoon.


“It is disqualifying for a modern-day presidential nominee to refuse to release tax returns to the voters, especially one who has not been subject to public scrutiny in either military or public service,” wrote the former GOP presidential nominee in a Facebook post. “While not a likely circumstance, the potential for hidden inappropriate associations with foreign entities, criminal organizations, or other unsavory groups is simply too great a risk to ignore for someone who is seeking to become commander-in-chief.”


Trump then stepped up with a surprise of his own and reversed course again last night, telling Fox News that he would, indeed, release his taxes before the elections. “I’ll release. Hopefully before the election I’ll release,” he said. “And I’d like to release.”


For anyone who had whiplash after all of this, Trump offered some comfort by reaffirming that whenever he might release his returns, there wouldn’t be anything of value to be discovered there anyway.


“You learn very little from a tax return,” he told Fox News.


Actually, as someone who saw Trump’s federal tax returns about a decade ago as part of a legal action in which he sued me for libel (the suit was later dismissed), I think there probably are some things to be learned from them.


The tax returns my lawyers and I reviewed were sealed, and a court order prevents me from speaking or writing about the specifics of what I saw. I can say that Trump routinely delayed—for months on end—producing those documents, and when they finally arrived they were so heavily redacted that they looked like crossword puzzles. The litigation ran on for five years, and during that time we had to petition the court to compel Trump to hand over unredacted versions of the tax returns—which he ultimately did.


So despite Trump’s statements to the contrary, here are some general questions that a full release of at least several years of his tax returns might usefully answer:


1) Income: Trump has made the size of his fortune a centerpiece of his presidential campaign, implying that it’s a measure of his success as a businessman. He has also correctly noted that the income shown on his tax returns isn’t a reflection of his total wealth. Even so, income is a basis for assessing some of the foundations of any individual’s wealth—and would certainly reflect the financial wherewithal of the businesses in which Trump is involved.


After Fortune’s Shawn Tully dug into Trump’s financial disclosures with the Federal Election Commission and an accompanying personal balance sheet his campaign released, he noted in March that Trump “appears to have overstated his income, by a lot, which could be the reason he has so far tried to avoid releasing his returns.” Tully said that Trump apparently boosted his income in the documents by conflating his various businesses’ revenue with his personal income. Trump didn’t respond to Tully’s assessment, but he could clear up all of that by releasing his tax returns.


2) Business Activities: Trump has long claimed that his company, the Trump Organization, employs thousands of people. He has also criticized Fortune 500 companies for operating businesses overseas at the expense of jobs for U.S. workers. Trump’s returns would show how active he and his businesses are globally—and would help substantiate the actual size and scope of his operation.


3) Charitable Giving: Trump has said that he’s a generous benefactor to a variety of causes—especially war veterans—even though it’s been hard to find concrete evidence to support the assertion. Other examples of major philanthropic largess from Trump have also been elusive. Trump could release his tax returns and put the matter to rest.


4) Tax Planning: There’s been global attention focused on the issue of how politicians and the wealthy use tax havens and shell companies to possibly hide parts of their fortunes from authorities. If released, Trump’s returns would make clear whether or not he used such vehicles.


5) Transparency and Accountability: Trump is seeking the most powerful office in the world. Some of the potential conflicts of interest or financial pressures that may arise if he reaches the White House would get an early airing in a release of his tax returns.

For the last 40 years, presidential candidates have released their returns. Trump, of course, has portrayed himself as the un-candidate, the guy who bucks convention. But disclosing tax returns is a valuable political tradition that’s well worth preserving.




Trump Doesn't Expect to Release Tax Returns by November



If Donald Trump refuses to release his tax returns before November, it would be “disqualifying” to the presumptive Republican presidential nominee’s election bid, former Massachusetts governor and 2012 party nominee Mitt Romney said.


Trump “doesn’t expect to release his tax returns before November, citing an ongoing audit of his finances,” according to an Associated Press report. It said he indicated he will release them after the Internal Revenue Service completes the audit.


“There’s nothing to learn from them,” Trump said, according to the published report.


The billionaire businessman later sought to clarify his remarks, but not before Romney renewed his criticism of Trump’s fitness for the presidency.


Trump on Twitter

Trump said in a Twitter post Thursday afternoon: “In interview I told @AP that my taxes are under routine audit and I would release my tax returns when audit is complete, not after election!” A campaign spokesman didn’t respond to requests for comment. New Jersey Governor Chris Christie, who supports Trump, told reporters Thursday that “if those audits are complete prior to Election Day, he’ll release his returns. If they’re not, he won’t.”


If Trump doesn’t release any returns before the Nov. 8 election, there’d be “an unprecedented level of secrecy surrounding his personal finances,” said tax historian Joseph Thorndike, the director of the Tax History Project at Tax Analysts, a trade publication.


Every major-party nominee “since Jimmy Carter has released at least a single return, and often quite a few more,” Thorndike said. Former President Gerald Ford released only a summary, not a full return, “but every candidate has done so since.”


Trump first said in February that he was being audited by the IRS, and wouldn’t release any returns until the audit is over. “For many years, I’ve been audited every year,” he said during a Feb. 25 Republican debate in Houston. “Twelve years or something like that.”


But IRS officials have said there’s no reason an individual can’t release his or her returns—even during an audit. Thorndike said there’s a precedent for doing so: President Richard Nixon disclosed his return while he was being audited in 1973.


Nixon’s Returns

“Nixon released his returns because he was under audit,” said Thorndike, a visiting scholar in history at the University of Virginia. “Presidential candidates don’t live by the same standards as everyone else—they agree to disclose a lot to voters. This is required by tradition. There’s no good explanation for him not to release his returns.”


Romney, who released two years’ worth of his tax returns during his 2012 presidential campaign, in March called Trump “a phony, a fraud,” and speculated that his tax returns must contain “a bombshell.” He repeated that theme on Thursday on Facebook, saying, “We can only assume it’s a bombshell of unusual size.”


Trump’s statements about whether he’d release tax returns have shifted over time. Last October, he said on ABC’s “This Week” that he would release his returns “when we find out the true story on Hillary’s e-mails.” The U.S. Justice Department is investigating Hillary Clinton’s use of private e-mail during her term as secretary of state, but hasn’t set a deadline for the investigation.

In response to a question in October about his effective tax rate, Trump said: "I’m not going to say it, but at some point, I’m going to release it. But I pay as little as possible, I’m very proud to tell you.”


‘Very Big Returns’

Then in January, Trump said on NBC’s “Meet the Press” that he was preparing to release returns. “We’re working on that now,” he said. “I have very big returns, as you know, and I have everything all approved and very beautiful and we’ll be working that over in the next period of time.”


Of the Democratic Party presidential candidates, Clinton, the front-runner, has posted returns from the past eight years on her website, and decades of returns for her and her husband, former President Bill Clinton, are available online. Vermont Senator Bernie Sanders, who is also seeking the Democratic nomination, has released only his 2014 tax return.


Clinton said during a campaign event in New Jersey Thursday that she plans to make Trump’s tax returns an issue in the general-election campaign. Christie called it “ironic that Hillary Clinton is talking about transparency to anyone, given that she has her own e-mail server that she used constantly and had her colleagues in the State Department use in order to avoid” public-record requests.





When Form Makes a Difference on Tax Deductions



Sometimes, the elevation of form over substance can be costly for those who commit a “foot fault” in structuring a transaction in the tax arena.


This was illustrated by the New Jersey Tax Court decision last month in Kraft Foods Global Inc. v. Director, Div. of Taxation, which ruled that the taxpayer, Kraft Foods Global, Inc., couldn’t deduct interest paid to its corporate parent, Kraft Foods Inc.


“Publicly traded companies can get better rates on bonds, so it’s common for a parent to get a loan from third-party bondholders and transfer the funds to its subsidiary,” explained David Gutowski, a partner at Reed Smith LLP. “Kraft Global received an intercompany loan from its parent, Kraft Foods Inc. In exchange Kraft Global gave its parent a promissory note with an interest rate the same as that paid by its parent to the bondholders. It did not guarantee Kraft Foods Inc.’s debt to the bondholders. Kraft Foods Global was audited by New Jersey, which increased its taxable income by adding back the interest expense.”


 “The Division of Taxation pointed to the statute which says that if you pay interest to an affiliate, you can’t deduct it,” he said. “You have to add it back unless you qualify for an exception. There are a number of exceptions in the statute, but Kraft Global didn’t meet any of them. For example, if the affiliate or intercompany lender had paid tax on the income, it would have qualified for an exception, or if Kraft Inc. was based in a foreign country, it probably would have, but those exceptions were not applicable here.”


“But there is a catch-all exception provision—the unreasonableness exception. If you can show that disallowing the deduction for the interest expense would be unreasonable, then you get to deduct it, and that’s what Kraft based its claim on—that it would be unreasonable to deny a deduction for this interest expense.”


“One can see the logic in permitting the deduction of interest payments where the taxpayer is the ultimate obligor [the ‘Guarantee Exception’] on the underlying debt and is using a related entity as a mere conduit to benefit from a more favorable interest rate obtained by the related entity than could be secured by the taxpayer,” the court stated. “In such circumstances, the taxpayer is the actual debtor paying interest to the unrelated third party lender, either directly or indirectly.”

To satisfy that exception, the taxpayer needs to provide a preponderance of evidence that it has guaranteed the underlying loan. But Kraft Foods Global did not guarantee the loan to its parent. Moreover, the Unreasonable Exception didn’t apply.


“Here, the Director acted reasonably when he determined that plaintiff did not meet its evidentiary burden,” the court said. “Plaintiff produced no document suggesting that it is ultimately responsible for Kraft Foods Inc.’s debts to its bondholders. Plaintiff has no obligation to Kraft Foods Inc. or to its bondholders to make interest payment on Kraft Foods Inc.’s debts. Plaintiff’s only legal obligation is to make periodic interest payments to Kraft Foods Inc. on the Promissory Notes it signed in favor of Kraft Foods Inc.”


The Kraft decision provides a useful roadmap for other taxpayers on how to deduct affiliated interest expense without falling into the trap of add-back,” according to Gutowski. “The general rule is that you have to add back the interest, but the exception is pretty easy to meet. Most taxpayers should be able to meet it.”


“The takeaway is that it’s easy to meet the exception, but it’s also easy to have a foot fault,” he said. “They were doing something that was the standard in the industry, but little differences can be important. Things that should really not have any legal significance can actually have a lot of significance, to the tune of $13 million. Although it can be a big deal, it’s easy to avoid with a couple of strokes of the pen—change the structure of the transaction a little bit and avoid add-back.”


“There are hundreds of millions of dollars running through intercompany lenders quite routinely,” Gutowski observed. “A lot of those involved don’t pay that much attention to it. They assume that money is moving from one pocket to another and that it doesn’t have much significance, but it does.”




Art of Accounting: Someone has to be the Boss in a Family Business



Someone has to be the boss. When the founder is active, he or she is usually the boss. There are exceptions, but I want to talk about parents who step aside to have their children run the business, particularly where there is more than one child working in the business.


I firmly believe there needs to be a boss, although I have seen some situations where two siblings can run the business as equals. One such time there were two brothers working alongside the father and I was assisting in the succession process. Part of the plan was to evaluate the brothers to see if they were capable of carrying on without the father and how they would interact with each other. In this case they had completely separate functions that each performed very well. One of the sons was in charge of the order entry, fulfillment, manufacturing, packing, distribution, purchasing and inventory. Over 300 people worked in those areas. The other son was in charge of the marketing and sales. While he was a powerhouse, only 10 people worked in those departments. The father maintained control of the finance and administrative functions.


At one of my meetings with the father I explained why there should be a “boss” and that the son with the much greater responsibilities should be made the president when the time came. The other son would be the vice president. This was during one of our usual confidential meetings where ideas were expressed and kicked around. Well, the father told the marketing son that I said his brother should be the boss and that he would work for his brother. The next time I was at their factory he tore into me and told me that I had some nerve making that suggestion and from that point on he would be “my enemy.” This was very upsetting, but the least the father could have done was tell the other son that I suggested he be the president!


That exchange destroyed the free and open advice I was providing to the father since nothing thereafter would be confidential. In effect the father, at that point, lost his confidential adviser. However, over time the full succession plan was implemented, and the company became much more successful with the two sons jointly in charge.


P.S.: When the father stepped aside the marketing son had the personal pleasure of discharging me as their accountant.


Lesson learned: Watch what you say about family members and assume everyone will know everything you say. I believe I do my job very well and also recognize that I need to provide the best advice I can. You just have to be prepared to deal with the consequences.


Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People List. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, published by and “Managing Your Tax Season, Third Edition,” published by the AICPA. Ed also writes a twice-a-week blog addressing issues that clients have at Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at (732) 964-9329 or




Obama Administration Expands Overtime Pay Eligibility



The Obama administration expanded overtime eligibility for millions of workers Thursday, releasing a long-awaited rule change that the Labor Department estimates will extend overtime pay to 4.2 million more workers.


The rule increases the salary threshold below which most white-collar, salaried workers are entitled to overtime from the current $455 per week (or $23,660 for a full-year worker) to $913 per week (or $47,476 for a full-year worker).


“If you work more than 40 hours a week, you should get paid for it or get extra time off to spend with your family and loved ones,” said President Barack Obama in a statement Tuesday previewing the announcement. “It's one of the most important steps we're taking to help grow middle-class wages and put $12 billion more dollars in the pockets of hardworking Americans over the next 10 years.”


Vice President Joe Biden spoke in Columbus, Ohio, on Tuesday about the new rules. Ahead of the announcement, he wrote, “Right now, you're guaranteed overtime if you’re an hourly worker, but if you’re salaried, you’re only automatically guaranteed overtime if you make less than $23,660. If you’re a manager on salary and you work an extra 10, 20, 30 hours a week—you often don’t get paid a dime more for those additional hours. That’s simply wrong. Starting in December, we're making sure that more workers get paid fairly for the overtime hours that they work. With this new rule, we’re increasing the cutoff for automatic overtime for salaried workers to $47,476—most salaried workers making less than $47,476 will be guaranteed overtime pay for working more than 40 hours a week.”


The final rule will also ensure the salary threshold is updated every three years; raise the “highly compensated employee” (HCE) annual salary threshold from $100,000 to $134,004; make no changes to the “duties test” under the white collar exemptions; and allow bonuses and incentive payments to count toward up to 10 percent of the new salary level. According to the Department of Labor, the rule will take effect on Dec. 1, 2016. Accountants will need to advise their business clients and the organizations where they work about the change.


“With one in five business owners unaware of the DOL’s proposed overtime rule and a limited window to meet the new standards, the time for business owners to act is now,” said Martin Mucci, president and CEO of the payroll giant Paychex, in a statement.


The salary threshold for the highly compensated exemption will increase every three years to the 90th percentile of earnings of full-time salaried workers nationally, according to Venable LLP employment law partner Brian Turoff. “The DOL estimates that this threshold will increase to $147,524 during the first automatic update in 2020,” he wrote. “The DOL will post all new salary thresholds 150 days in advance of their effective date, beginning Aug. 1, 2019.”


Not everybody is happy with the new rules, however. Speaker of the House Paul Ryan, R-Wis., is vowing to fight it. “This regulation hurts the very people it alleges to help,” he said in a statement. “Who is hurt most? Students, nonprofit employees and people starting a new career. By mandating overtime pay at a much higher salary threshold, many small businesses and nonprofits will be unable to afford skilled workers and be forced to eliminate salaried positions, complete with benefits, altogether. For the sake of his own political legacy, President Obama is rushing through regulations—like the overtime rule—that will cause people to lose their livelihoods. We are committed to fighting this rule and the many others that would be an absolute disaster for our economy.”


The American Institute of CPAs also registered its objections. “The AICPA has clearly and consistently outlined its concerns that the Department of Labor proposed rule will increase the administrative burden in complying with the regulations while dramatically increasing employers’ payroll costs,” said AICPA president and CEO Barry Melancon. “The proposed revisions fail to modernize or streamline the regulations, are not reflective of the realities of the modern workplace and a changing workforce, and would adversely affect both employees and employers. DOL’s modifications to the rule did little to lessen the likelihood that CPA firms and countless other businesses will be forced to curtail hiring—and may even have to reduce the size of their workforce. The changes would have an especially negative impact on smaller accounting firms and the millions of small business clients they represent that simply cannot afford to raise their salaries for exempt employees above the new proposed threshold but also cannot afford to pay overtime to exempt workers. As a member of the Partnership to Protect Workplace Opportunity—a diverse group of stakeholders including businesses and associations that represent millions who could be impacted by the proposed rule—we urge Congress to intervene in the process so that regulations governing overtime pay reflect the evolving workplace in a manner that is not economically counterproductive.”


The financial information company Sageworks also raised concerns. “Raising the minimum overtime-eligible salary to $50,440 (with increases each year) will kill startups, and it will hurt young people who will not be able to be hired in those start-ups,” wrote Sageworks chairman Brian Hamilton and research specialist Mary Ellen Biery in a recent opinion piece for The Hill.

However, the new rule promises to help many Millennial workers (see Millions of Millennials May Benefit from New Rule on Overtime). While they only represent 28.2 percent of the salaried workforce, they comprise 36.3 percent of those now covered under the new rule, according to Ross Eisenbrey, vice president of the Economic Policy Institute.


Workers struggling to make their paychecks cover their living expenses are likely to welcome the extra take-home pay promised by the new rule.




Millions of Millennials May Benefit From New Rule on Overtime


Burning the midnight oil is about to pay off for millions of U.S. millennials.


The White House on Tuesday announced a new rule that will boost the number of Americans who qualify for time-and-a-half pay whenever they work more than 40 hours in a given week. Among the biggest beneficiaries may be overworked young employees, toiling at startups and ad agencies or serving as restaurant managers, who so far haven't been getting the extra compensation for working around the clock.


The new rule, which takes effect on December 1, doubles the salary threshold for overtime eligibility to $47,476 a year from the current $23,660. That means that employees earning an annual salary at the new threshold or lower will automatically be eligible for overtime wages, just like hourly workers who already qualify for this extra rate.


Workers across all age groups stand to benefit, but young workers can especially expect a boost, according to Ross Eisenbrey, vice president of the left-leaning Economic Policy Institute.


"Millennials are disproportionately affected by the overtime rule because they tend to be in the lower end of the wage spectrum," said Eisenbrey, who testified at a congressional hearing last week on the potential effects of the rule. "Though they only represent 28.2 percent of the salaried workforce, they make up 36.3 percent of the newly covered."


According to Eisenbrey's calculations, the share of salaried 25-to-34-year-olds directly benefiting from overtime protections will jump from 9.1 percent now to 38.4 percent under the new threshold. For 16-to-24-year-olds, it will increase from 31 percent to 64.1 percent. That translates to more than 4.5 million newly benefiting workers between the ages of 16 and 34 (and an additional 8 million workers who are 35 or older). Hourly workers, who already get overtime protections, represent 58.5 percent of the American labor force.


The rule marks the federal government's first adjustment to overtime standards in more than a decade.


The threshold was last updated in 2004 after almost 30 years without an increase, and the Obama administration says inflation has been cutting into the real value of that threshold. Still, some say such a large increase in the salary threshold could have unintended consequences. Researchers at George Mason University released a study last month that argued employers will respond by cutting base salaries to account for the addition of overtime pay. Companies may also replace these workers with a smaller number of higher-skilled employees who earn salaries above the new threshold, the researchers said.




Trump Claims Income of More than $557 Million on Disclosure



Donald Trump claimed income of more than $557 million over the last year, though the campaign provided few details on the sources of the money.


The presumptive Republican presidential nominee made the assertion on his income in a news release on Tuesday to announce that he had filed his required annual financial disclosure with the Federal Election Commission. But the campaign didn’t release the document.


Trump, a billionaire with interests in real estate, golf resorts and licensing, has campaigned on his business acumen while facing repeated questions about his income, net worth and taxes. Unlike other candidates, he has declined to release his tax returns, saying he will do so after the Internal Revenue Service completes an audit. IRS officials have said there’s no reason taxpayers can’t make their returns public, even during audits.


Democratic front-runner Hillary Clinton’s campaign released her 11-pagefinancial disclosure Tuesday night after Trump’s news release.


Trump’s statement says the $557 million in income “does not include dividends, interest, capital gains, rents and royalties.”


Corey Lewandowski, Trump’s campaign manager, said the campaign wasn’t obligated to provide any more specifics to reporters. “It’s not our obligation to release it,” he said. “It’s our obligation to file it.”


The FEC will eventually make the form itself public, but the agency has as many as 30 days to review it first.


Net Worth’

The news release said Trump’s net worth has increased since his last financial disclosure, a 92-page document that he filed in July 2015. “As of this date, Mr. Trump’s net worth is in excess of $10 billion dollars,” the release said.


News reports have questioned the value that Trump places on his assets. Bloomberg News last year estimated his net worth at $2.9 billion. “They don’t know what they’re talking about,” Trump told CNN last July in response to that estimate.


When his actual 2016 filing is released, it may not shed much light on the net-worth question. Any asset worth more than $50 million gets counted the same on the forms. Last year, Trump claimed 23 such assets, including aircraft, the Mar-A-Lago Club in Palm Beach, Florida, and a golf course in Scotland.


It’s also unclear how Trump is defining income. As first reported by Fortune, his 2015 disclosure appeared to conflate income and revenue for 20 income-producing properties that are among his largest, including golf courses and hotels. Federal disclosure requirements say a candidate must disclose income, which would be a smaller number than revenue—after accounting for business expenses.


‘Government Definition’

Asked about the difference, Lewandowski said, “It’s whatever the government definition is. I’m not going to get into semantics.”


Trump also touted the fact that he had filed his financial disclosure before Vermont Senator Bernie Sanders, who is competing with Clinton for the Democratic nomination. Michael Briggs, a spokesman for Sanders, didn’t immediately respond to an e-mail request for comment. Candidates can seek as many as two extensions of 45 days each for filing financial disclosures.


“This is the difference between a businessman and the all talk, no action politicians that have failed the American people for far too long,” Trump said in the news release.

—With assistance from Jennifer Epstein and Arit John.






Why Should Trump Get Special Treatment for His Tax Returns?

by Joseph J. Thorndike


1 ? ? 5


Donald Trump has now reneged on his promise to release his personal tax returns. That should come as no surprise, given The Donald’s difficulty in keeping his story (and his excuses) straight.


But in saying that he expects to disclose no tax returns before the November election, Trump is set to become the first major party nominee since 1976 to elevate his personal privacy over the public interest.


Don’t be confused: There is a vital public interest at stake. Refusing to release a tax return sullies the reputation of a candidate, prompting endless rounds of damaging speculation. Just ask Mitt Romney.


But tax stonewalling also threatens something more important: The integrity of the tax system. That’s not something we can tolerate or excuse in any candidate – even one who has built his brand on breaking all the rules.


Tax return disclosure is important for many reasons. Most obviously, returns can tell us a lot about a candidate’s finances. They tell us how much taxable income he reports (which is different from how much actual income he earns, since tax returns leave some kinds of income, like unrealized capital gains, out of the picture).


Returns can also tell us how much tax a candidate pays in taxes, which by extension tells us about her average tax rate. In a political world of Buffett rules and millionaire surcharges, that sort of information is interesting and maybe even relevant to a candidate’s bid for office.


But other factors are even more important. Returns can shed light on the way a candidate lives his life. It can tell us about charitable giving as well as personal borrowing and investment activity. Returns can also illuminate the complicated business arrangements that often provide the bulk of a candidate’s income, especially for a real estate mogul like Trump.


Again, these bits of information are important, putting hard data behind a candidate’s breezy claims to probity, generosity, and honesty.


But tax returns tell us something else, too – something much harder to define but vastly more important. Tax returns tell us a lot about how candidates conduct themselves in the gray areas of the tax law. Some items on a tax return are black and white, like the income reported on a W-2. But other items, especially for someone with lots of non-salary business income, are open to debate and interpretation.


Consider, for instance, the home office deduction. Lots of people with far less money than Trump claim this tax break. But whether the home office deduction is justified under the rules is often a matter of interpretation. Is a home office used solely for business, or does it double as a kid’s playroom? Is it used regularly for business, or just once in a while? The answers to those questions are often open to debate – which is one of the reasons why the IRS conducts audits.


Now imagine that you’re not a self-employed, aspiring novelist working from the kitchen table but a billionaire real estate investor with homes, offices, and investments scattered around the world. You, too, have lots of items on your tax return open to some debate. Some of your claims and positions might be entirely defensible, others less certain. A few might be simply implausible. Sorting out which is which can be complicated—and again, that’s what audits are for.


But voters, not just the IRS, also have the right to know how a candidate – and especially a rich candidate – is approaching the tax laws. Is she trying to wring every last ounce of advantage from the tax laws? If so, then good for her. Is she trying to get every last drop of reasonable tax minimization, plus a few extra gallons of questionable advantage? Then not so good for her.

And what if a candidate – or a president (since all these same issues would apply to a President Trump who would presumably still be under audit once he’s ensconced in the Oval Office) – is making outright errors on his return. What if he is engaged in genuine wrongdoing? Voters certainly have a right to know that, too.


Of course, we could rely on the IRS to keep tabs on the president (and the various candidates) on our behalf. But that’s not so simple, either. After all, the IRS commissioner works for the president, as does the commissioner’s boss, the Treasury secretary. Can we really count on the president’s subordinates to keep the president in line?


For the most part, I think we can. But doubts about the agency’s ability to audit the president are real and persistent. Indeed, those doubts are what prompted Nixon to release his tax returns back in 1973. Critics – including my employer, Tax Analysts – insisted that a reliable presidential audit could only be conducted by an independent auditor.


The IRS considered that argument, but ultimately rejected it. And Nixon’s last IRS commissioner, Donald Alexander, soon demonstrated that the agency could be relied upon to audit the president with independence and authority.


But Alexander’s audit was bolstered by something new: a communal audit of the president’s returns conducted by the entire nation. When Nixon released his returns to the public, he ensured that every American would have a chance to evaluate his honesty and candor. That decision, in conjunction with the simultaneous IRS audit, helped shore up the country’s faltering faith in its tax system.


Today we might call Nixon’s tax disclosure a form of “social auditing.” Every president since has recognized the value of social auditing (with the exception of Gerald Ford, who released only partial tax information during his abbreviated stint in office).


More to the point, every major party presidential nominee has also acknowledged the importance of social auditing, releasing at least a single year’s return, sometimes several, and occasionally dozens.


These candidates have all recognized that social auditing is a way of demonstrating not just their personal integrity, but the integrity of the tax system itself. Public disclosure of personal tax returns ensures that every president – and every serious presidential aspirant – gets the same hard look that regular taxpayers get from the IRS.


Donald Trump seems to think that such concerns are not his problem. He wants special treatment from American voters – looser, less exacting rules than those applied to every other commander (and taxpayer) in chief.


Trump shouldn’t get that special treatment. And he should release his tax returns today.





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


15427 Vivian - Taylor, Michigan 48180 – voice (734) 946-7576  fax (734) 946-8166

website:    email:  Tax ID # 38-3083077