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Are US Billionaires Really Paying A Lower Tax Rate Than Working People? Probably Not.

By Howard Gleckman


Economists Emmanuel Saez and Gabriel Zucman of the University of California at Berkeley have a new bookthat has generated an enormous amount of attention. One key conclusion: The richest 400 families in the US paid an average effective tax rate of 23 percent in 2018, while the bottom half of US households paid 24.2 percent of their income in taxes. For a geeky bit of tax data, their conclusion has produced a storm of tweets and some eye-popping headlines:


“The Rich Really Do Pay Lower Taxes Than You” The New York Times, October 6, 2019

“For the first time in history, U.S. billionaires paid a lower tax rate than the working class last year” The Washington Post, October 8, 2019

“America's richest 400 families now pay a lower tax rate than the middle class” CBS News, Oct 9, 2019


But are the Berkeley profs right or is this just hype? The answer is by no means straightforward. It depends on what you are measuring and how you are doing it. And the choices Saez and Zucman have made were necessarily arbitrary and more than a little controversial.


Start with what they are measuring. They say they are looking at all US taxes (including state and local taxes, federal individual and corporate income taxes, payroll taxes, estate taxes, and excise taxes) for 2018. 


No refundable credits

That brings us to the first problem: There are no official tax data for 2018 (millions of people still are filing their returns). So Saez and Zucman built their analysis on older data and extrapolated to 2018. But because the 2017 Tax Cuts and Jobs Act (TCJA) fundamentally changed the individual and corporate income tax codes, that is no easy feat.


Then there is the matter of what they were measuring. While Saez and Zucman used an extremely broad definition of taxes, they left out refundable tax credits like the earned income tax credit (EITC) and the child tax credit (CTC). Thus, a worker with two children who received a refundable portion of their CTC of $2,800 (the maximum allowed) would look like they paid zero federal income tax when they really paid a negative tax. The $2,800 tax benefit would not appear in their distributional analysis, making this family’s total effective tax rate appear much higher than if the refundable credits were included (remember, lower-income households probably are paying payroll taxes and state and local taxes).


Zucman has argued elsewhere that the refundable portion of these tax credits really is spending and should be excluded from any tax analysis. There is no difference, he suggests, between the EITC and, say SNAP (food stamps).


How TPC does it

But there is a difference. The EITC and CTC are part of the federal income tax code. They are administered by the IRS. Yes, they feel in many ways like spending. But they were created to help offset the burden of payroll taxes and should be treated like taxes for the purposes of distributional analysis.


That’s how my colleagues at the Tax Policy Center do it. And TPC concludes that the lowest income 20 percent of households pays an effective federal tax rate of just 2.9 percent. The next 20 percent pays an effective federal rate of 7.6 percent.  Overall, TPC finds that federal taxes are highly progressive, with effective federal tax rates ranging from 2.9 percent for the lowest income 20 percent to 30.6 percent for the top 0.1 percent (about 120,000 households).


State and local taxes are less progressive than federal taxes, and some are regressive. State income tax rates, for example, often top out at very low levels of income. And everyone pays the same sales tax rate, though low income people spend a larger share of their income than higher-income consumers, and often for goods that are more likely to be taxable.


In 2018, the Institute on Taxation and Economic Policy (ITEP) calculated the average effective tax rate for the lowest income 20 percent of households was 11.4 percent while the next 20 percent paid an average effective rate of 10.1 percent. ITEP used the 2018 tax law (including the TCJA) but based its analysis on 2015 state economic data.  It also included only taxpayers under age 65.


Lower estimates

Because they are calculated differently, you can’t just add TPC numbers and ITEPs. And even if you could, you couldn’t quite compare them to Saez and Zucman. But as very rough measures, the two sets of estimates suggest that average effective rates for low- and moderate-income households are far lower than Saez and Zucman figure.  


The professors’ estimates for the very highest income households raise other questions. For example, who are these people? Forbes magazine has a list of the richest 400. The IRS used to do its own estimates of tax liability of households with the very highest incomes, but  stopped reporting on its Top 400 back in 2016. And when the “n” of what you are measuring is just 400 out of 150 million taxpayers, errors can compound fast.


Those older IRS data (they were from 2014) do show that effective income tax rates flattened for the highest income filers, largely because tax rates on capital gains and dividends--where they make most of their income-- are lower than rates on wages and salaries.


Arguments about methodology shouldn’t mask Saez’s and Zucman’s bigger point: Incomes of the very rich are rising faster than for all other income groups. And the TCJA cut the taxes of high earners by more on average than for low- and moderate-income households, as a share of after-tax income. But that doesn’t mean that “billionaires paid a lower tax rate than the working class.”     




Paying the Tax Revenue Price for Underfunding the IRS

James Edward Maule


For as long as I have been involved in studying, teaching, paying, writing about, and preparing returns for, federal income taxes, I have criticized the Congress for underfunding the IRS. Those criticisms have found their way into posts such as Another Way to Cut Taxes: Hamstring the IRSSo Cutting IRS Funding Won’t Decrease Revenues? Yeah, OK The Continued Assault on the Tax Foundations of American Civilization, and Voting for Tax Refund Delays.

For me, the prospect of paying $1 to get $7, in a situation where that outcome has been proven time and again, is an investment far more attractive than pretty much anything else available. So who would oppose such a step? The answer is simple. The opposition comes from those who don’t want the $7 to be collected, because their once-hidden-but-now-obvious goal is to destroy government by cutting off its revenue oxygen. Who would want that to happen? The answer again is simple. Those who want this result are those who would profit by shifting government functions into the hands of oligarchs who are beyond the reach of the ballot box, and who find fulfillment only in the oppression of others. Money-addicted and vying for supremacy as the chosen one, the elimination of government through the destruction of tax revenues is but one step in the process of creating a world owned and operated by a handful of oligarchs, though each envisions a way to become the “top dog” in such an arrangement.

A few days ago, the Center on Budget and Policy Priorities published an article demonstrating the impact of IRS underfunding on the collection of tax revenues. For those who already understand the larger forces at work, the report is a sad verification of what has been happening. For those who think that the warnings about tax revenue reduction and the replacement of government by private enterprises unresponsive to the people is nothing more than alarmist demagoguery, the report is yet additional proof of the risks posed by IRS underfunding, though unfortunately too many of those who don’t see the problem are unlikely to be swayed by facts.

What the article provides is an explanation of a more detailed report by the Treasury Inspector General for Tax Administration. That report reveals that “deep IRS funding cuts over the last decade have weakened the agency’s ability to perform its core functions.” As the article summarizes it, “Staff time [invested in enforcing the payment of income and payroll taxes by employers] plummeted by 84 percent between 2013 and 2017” because of underfunding by Congress. Had adequate funding been provided, at least $3.3 billion in unpaid payroll and withheld taxes would have been collected. Though that amount might pale in comparison to the annual $1 trillion deficit caused principally by dishing out tax breaks to starving billionaires and multi-millionaires, it is but one tiny facet of a significant revenue shortfall attributable to insufficient IRS funding. Between 2010 and 2019, IRS funding for enforcement has been cut by 25 percent, adjusted for inflation.

As I noted in So Cutting IRS Funding Won’t Decrease Revenues? Yeah, OK , at least one member of Congress, a few years ago, made the absurd claim that increasing IRS funding would not increase tax revenue, tossing out numbers that reflected several of those ill-advised tax cuts pushed through by the starving oligarchs. This genius legislator made that claim in order to support the additional claim that cutting IRS funding would not decrease tax revenue. The TIGTA report demonstrates why this sort of thinking is deeply flawed and certainly warped by ulterior motives.

In Voting for Tax Refund Delays, I wrote:

It is mind boggling that people will vote for what they don’t want. Though in some instances people are tricked into voting for what they don’t want when politicians use deception to hide their true intentions, the politicians who are working to destroy the tax foundations of civilization have been very clear that they are on a tax-elimination campaign that includes the destruction of the IRS. Folks, if you think it’s bad now, imagine what it will be like when the system falls apart. And it will, if people continue to vote for what they don’t want.


Nothing that has happened since I wrote those words four years ago has caused me to think that cutting IRS funding is a good thing. What has happened in the last four years strengthens my concern that too many people vote for what they don’t want, chiefly because they don’t understand how what they want fits in with everything else. I wonder how many people who think they want taxes abolished or reduced to negligible amounts, and who desire the abolition of the IRS, will be joyous when the face the consequences. It’s not just a revenue price that will be paid for eliminating government.




If It’s Not Your Tax Refund, You Cannot Keep the Money

BY James Edward Maule


Readers of MauledAgain know that I enjoy watching television court shows, not only because they often are amusing and instructive, but also because tax issues pop up from time to time. Some of my commentaries on episodes involving tax include Judge Judy and Tax LawJudge Judy and Tax Law Part IITV Judge Gets Tax Observation CorrectThe (Tax) Fraud EpidemicTax Re-Visits Judge JudyFoolish Tax Filing Decisions Disclosed to Judge JudySo Does Anyone Pay Taxes?Learning About Tax from the Judge. Judy, That IsTax Fraud in the People’s CourtMore Tax Fraud, This Time in Judge Judy’s CourtYou Mean That Tax Refund Isn’t for Me? Really?Law and Genealogy Meeting In An Interesting WayHow Is This Not Tax Fraud?A Court Case in Which All of Them Miss The Tax PointJudge Judy Almost Eliminates the National DebtJudge Judy Tells Litigant to Contact the IRSPeople’s Court: So Who Did the Tax Cheating?“I’ll Pay You (Back) When I Get My Tax Refund”Be Careful When Paying Another Person’s Tax Preparation FeeGross Income from Dating?Preparing Someone’s Tax Return Without PermissionWhen Someone Else Claims You as a Dependent on Their Tax Return and You DisagreeDoes Refusal to Provide a Receipt Suggest Tax Fraud Underway?When Tax Scammers Sue Each OtherOne of the Reasons Tax Law Is ComplicatedAn Easy Tax Issue for Judge JudyAnother Easy Tax Issue for Judge JudyYet Another Easy Tax Issue for Judge JudyBe Careful When Selecting and Dealing with a Tax Return PreparerFighting Over a Tax RefundAnother Tax Return Preparer Meets Judge JudyJudge Judy Identifies Breach of a Tax Return ContractWhen Tax Return Preparation Just Isn’t Enough, and Fighting Over Tax Dependents When There Is No Evidence.

Now a new television court show is being aired. Jerry Springer has opened up a television courtroom. It didn’t take long for a tax issue to arise. In this episode, brought to my attention by Reader Morris, a tax refund was front and center. For some reason, the first part of the show is missing, but it appears that the plaintiff sued the defendant because the plaintiff’s tax refund ended up in the defendant’s bank account and apparently the defendant did not want to turn the money over to the plaintiff. I am guessing that the plaintiff and defendant were not related to each other, or friends or acquaintances.

The evidence showed that the accountant made the mistake, by using the wrong bank information on the plaintiff’s return. This caused the refund to be direct deposited into the defendant’s bank account. The plaintiff had a statement from the defendant’s bank showing that the refund indeed was direct deposited into the defendant’s bank account.

Judge Jerry noted that the mix-up was not the defendant’s fault. However, he explained that no matter who made the mistake, whether the defendant, the accountant, or the IRS, the money was not the defendant’s to keep. Thus, he ruled that the defendant was obligated to transfer the money to the plaintiff.

I don’t know enough to know why the accountant did not contact the IRS, ask it to reverse the transaction and deposit the refund into the correct account. Because the first part of the episode is missing, I don’t know if there was an explanation. Perhaps there was a reason that the accountant could not do that, perhaps because the accountant was no longer around. Perhaps the IRS will reverse a deposit if it made the mistake but not if the taxpayer or the tax return preparer made the mistake. One can imagine the mess that would arise if at this point the IRS tries to reverse the deposit and put the money in the plaintiff’s bank account. At that point the defendant might end up suing the plaintiff.

The lesson is simple. Be careful. Be very careful. Double check, even triple check, bank routing numbers and bank account numbers, along with everything else on the return. Have someone else review the return. A second pair of eyes often is helpful, and sometimes can prevent disasters.





SCOTUS weighs hearing interstate double-taxation case

By Roger Russell


The Supreme Court will soon decide whether to grant certiorari to a case (decide to hear it) where taxpayers that resided in one state but met the definition of a “statutory resident” in another state were subject to taxation of all of their income in both states. The case is scheduled for conference on Oct. 1, 2019.


The taxpayers, Samuel and Louise Edelman, lived in Connecticut but worked in New York where they owned an apartment. Although their primary residence is in Connecticut, they met New York’s definition of a “statutory resident” and were subject to taxation by both states. A “statutory resident” under New York law is an individual who spends any portion of 183 days or more in New York and maintains a “permanent place of abode” in the state. When the Edelmans sold interest in their business, they were taxed on all of their intangible income from the sale by both Connecticut and New York, but were not allowed any credit by New York for the tax paid to Connecticut.


A petition for certiorari was also filed with the Supreme Court in June 2019 in Richard Chamberlain and Martha Crum v. New York State, a second case involving the same issue.


 “There are two separate petitions, but the brief submitted by New York treats them similarly,” explained Michael Lurie, an associate at law firm Reed Smith who co-authored an amicus curiae brief on behalf of the Business Council of New York.


“The court might take one of the cases and hold the other, rather than having to consolidate two cases,” he said. “That way they can deal with just one set of facts, and not have to worry about any minor factual differences where the legal issues are identical. If they decide to affirm the lower court, they would dismiss the other case. Then, if they were to reverse the decision below, they could take the second case and remand it back to the New York court.”


“The issue is internal consistency,” said Lurie. “The test is whether, if every state adopted the same tax, would the same taxpayer who engages in an activity in multiple states pay more tax than a taxpayer doing the same activity in a single state. If it fails this test, then it discriminates against interstate commerce.”


Andrew Harrer/Bloomberg

New York’s statutory residency provision fails the internal consistency test, Lurie said. Under a 2015 Supreme Court decision in Comptroller of the Treasury of Maryland v. Wynne, a tax on individual income that fails the internal consistency test violates the Commerce Clause.


New York courts held that the provision does not violate the Commerce Clause, because it does not affect interstate commerce. In its brief, New York argued that its tax scheme did not conflict with Wynne and "passes the internal consistency test.”


In its brief, New York cited 10 other states that have both materially identical definitions of statutory residents and similar limitations on credits for intangible income, thus creating opportunities for other states to rule on the issue and potentially delaying any response by the Supreme Court. The reply brief for the petitioners counters this by noting that “even if further percolation were likely, it would be of limited value here. Petitioners seek this court’s review on the basis of a conflict not among decisions of the lower courts,but rather with a decision of the court itself.”


The New York decision sought to be reversed is part of a trend of state courts avoiding the Supreme Court’s Commerce Clause precedent by labeling an interstate activity as “intrastate,” according to Lurie. “This case provides a suitable vehicle to stop this trend,” he said.

Although the end result is unfair on its face, that doesn’t guarantee the court will agree to hear the cases.




IRS small biz unit pivots to cryptocurrency enforcement

By Michael Cohn


Newly appointed officials in the Internal Revenue Service’s Small Business/Self-Employed division plan to make changes in the agency's strategy for dealing with collections and enforcement in the area of cryptocurrencies like Bitcoin and Ethereum.


Eric Hylton, who was recently named commissioner of the SB/SE Division, along with Darren Guillot, the new deputy commissioner for collection and operations support in SB/SE, and De Lon Harris, the deputy commissioner for examination in SB/SE, spoke during a conference call with the media last week about their plans. They began their new roles at the IRS on September 1, but they all previously worked in various parts of the IRS before being promoted to top jobs at SB/SE.


Hylton said cryptocurrency would be one focus, as well as syndicated conservation easements and micro-captive insurance. The IRS announced this week that it has begun sending letters to taxpayers who have been under audit for participating in micro-captive insurance tax schemes (see IRS offers to settle with insurance tax scammers).


“As we’ve been looking at things initially, we are formulating our priorities, but obviously cryptocurrency is an area that we want to look at, and take a strong look from an examination and collection standpoint as well,” he said. “We are also thinking about syndicated conservation easements, and microcap insurance. Those are the areas where I think we will be taking a look at, but we will be solidifying priorities in the coming months. But cryptocurrency is an emerging issue, and we are collaborating with the Large Business & International office on that, as well as to the extent possible [Criminal Investigation].”


Guillot explained that the IRS has been training its revenue officers in how to determine the value of cryptocurrency and to ask taxpayers whether they have any. “From a collection standpoint, we have spent a considerable amount of time and effort over the past year making sure that the revenue officers throughout the country have training on how to detect, evaluate and determine the value of virtual currencies, and also where taxpayers are not in compliance,” he said. “Enforcement’s our last resort. It’s never our first resort. But where taxpayers are not working to resolve their tax balances with us amenably, or are in possession of virtual currency, we have trained our employees on how to value those assets and seize them.”


The IRS has been taking advantage of data analytics technology to determine whether taxpayers own any cryptocurrency. “We have a number of analytical tools that have given us access to learning about taxpayer cases, where they are potentially the owners of a virtual currency,” said Guillot. “We will routinely ask taxpayers as part of a financial interview whether or not they possess virtual currency. It’s important that they’re forthcoming with us and tell us whether they have that virtual currency. The IRS treats virtual currency like an asset. It doesn’t mean that they’ve done anything wrong. It’s just important when we ask you about whether you have virtual currency to be straightforward with us and let us know that you have that virtual currency.”


Harris has plans for further leveraging data analytics at the IRS. “Data analytics is playing a big role, not only here at the IRS, but out in the world in general,” he said. “I plan on looking at how we can more effectively use data analytics to make sure that we are getting the right work out there to the revenue agents to do examinations. I kind of look at that as also being a taxpayer service initiative. We certainly don’t want people out there knocking on doors doing audits where there’s nothing to find, but we want to make sure that we are looking at the returns with the highest risk for noncompliance. So we’ll be looking at how we’re using data analytics at SB/SE and I’ll be getting briefed on that and how we can strengthen that in the selection of casework.”


Taxpayers should still be careful that they are dealing with genuine IRS agents and revenue officers when they open their doors to a potential examiner. “With the proliferation of impersonation schemes, and concern about whether people are meeting with authentic revenue officers or revenue agents out in the field, the revenue officers almost always make unannounced field visits — that’s really important — and carry sufficient forms of identification with them so that taxpayers can verify that they really are with the Internal Revenue Service,” said Guillot. “And there’s more information at about how to do that.”


The IRS plans to focus on cases where there appears to be genuine evidence of fraud, whether it’s in the cryptocurrency area or another. “Consistently, we’re looking for quality cases, whether it’s audit, collection or different things of that nature,” said Hylton. “If you see that there’s badges of fraud that are associated with a particular audit for a collection case, what we want to do is emphasize that could be potentially a referral to CI. There is no set percentage that we’re striving for. We want to increase that relationship with CI going forward, but as the Commissioner [Charles Rettig] has expressed before, if there are abuses of the tax law, we will pursue them and we will pursue them vigorously. That’s really our emphasis.”




IRS overlooked billions in unpaid employment taxes

By Michael Cohn


Businesses that failed to file employment tax returns got away with billions of dollars in unpaid taxes because the Internal Revenue Service was forced to redirect its staff to other priorities, according to a new report.


The report, from the Treasury Inspector General for Tax Administration, examined the IRS’s ability to assess tax liabilities against employers who don’t file employment tax returns. When a taxpayer fails to file a tax return, the IRS is authorized under Section 6020(b) of the Tax Code to determine and assess a tax liability. For some businesses with missing employment tax returns, the IRS can prepare its own substitute return for them using what’s known as the Automated 6020(b), or A6020(b), program.


The nonfiler case creation process for business returns has been on the decline since fiscal year 2011 and virtually stopped in October 2016 because of significant reductions in staffing at the IRS. The creation of fewer nonfiler cases led to a reduction of work selected for the A6020(b) program. Thanks to resource limitations at the IRS, new case starts in the program have been declining since fiscal year 2014 and came to a halt in November 2016. That meant the program flagged fewer returns and collected less revenue on employment tax nonfiler cases because the IRS wasn’t initiating any new cases.


Today, high-dollar nonfiler employment tax cases have to be manually assigned to the A6020(b) program in order for the IRS to work on them because there’s a low dollar threshold for them to be assigned automatically. TIGTA suggested that if the IRS removed the dollar threshold associated with systemic and manual case selection, hundreds of thousands of high-dollar cases could be flagged by the program.


The IRS has the potential to collect billions of dollars from the cases. TIGTA identified 243,210 standalone nonfiler employment tax modules (that is, taxpayers with unfiled tax returns but no balances due) that were assigned to other IRS collection functions as of January 2019. “If the IRS assigned the top 86,554 modules to the program, based on the highest dollar proposed assessments, the IRS could potentially assess more than $10.2 billion and potentially collect more than $3.3 billion,” said the report.


From those cases closed between fiscal years 2011 and 2017, TIGTA also spotted 6,784 cases for which the program didn’t post a tax assessment when it should have. That prompted a loss of proposed assessments of $19.7 million and potentially $6.4 million of revenue.


TIGTA made six recommendations in the report, saying the IRS should consider allocating more resources to the A6020(b) program for fiscal year 2020. TIGTA also suggested the IRS should update the systemic and manual case selection criteria to work on high-dollar cases, as well as transfer the highest dollar standalone nonfiler inventory from other collection functions so they can be worked on by the program. The IRS should also do system fixes to ensure that A6020(b) default assessments post as they should.


In response to the report, IRS officials agreed with three of the six recommendations and plan to take action. The IRS also partly agreed with the other three recommendations, but said a research project is needed first to improve inventory and resource allocation across the business nonfiler programs before it can make any case selection changes.


“In recent years, resource constraints have forced us to make difficult decisions with respect to some of our programs even though they provide clear benefits to tax administration,” wrote Mary Beth Murphy, who was then commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “New case starts for the Automated 6020(b) program were halted in November 2016 as resources were redirected from nonfiler programs to other priority work such as balance due notices and installment agreement requests.”


However, she added that the IRS recognized the importance of nonfiler programs in promoting taxpayer compliance so it established a nonfiler strategic plan in 2018 and is in the process of transitioning the Automated 6020(b) program to a new location. It plans to allocate more resources to the program next fiscal year. Murphy also pointed out that the A6020(b) program only assesses tax liabilities, but doesn’t collect them. Other IRS programs affect collection, so the A6020(b) program shouldn’t be viewed in isolation, she argued, but instead should be viewed as part of a balanced approach between the IRS’s balance due and nonfiler programs.




IRS updates per diem rates for lodging and meal expenses when traveling

By Michael Cohn


The Internal Revenue Service issued new per diem rates Wednesday, Sept. 25, for business travelers to use for lodging, meals and incidental expenses, effective Oct. 1, 2019.


Notice 2019-55 provides the annual update to the rates that taxpayers can use to substantiate the amount of expenses for lodging, meals, and incidental expenses when traveling away from home. The notice also includes the special transportation industry rate, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method.


Use of a per diem substantiation method isn’t mandatory, the IRS noted. Taxpayers can substantiate the actual allowable expenses if they maintain adequate records or other sufficient evidence for proper substantiation.


The special meals and incidental expenses rates for taxpayers in the transportation industry are $66 for any locality in the continental United States and $71 for outside the continental U.S. The rate for the incidental expenses only deduction is $5 per day inside or outside the U.S. For the high-low substantiation method, the per diem rates are $297 for travel to any high-cost locality and $200 for travel to any other locality within the continenal U.S.. The amount of the $297 high rate and $200 low rate that’s treated as paid for meals is $71 for travel to any high-cost locality and $60 for travel to any other locality within the continental U.S. The per diem rates in lieu of the rates for the meal and incidental expenses only substantiation method are $71 for travel to any high-cost locality, and $60 for travel to any other locality within the continental U.S. High-cost localities have a federal per diem rate of $248 or more.




Labor Dep't extends overtime pay eligibility

By Michael Cohn


The U.S. Department of Labor announced a final rule for overtime pay that it said would make 1.3 million American workers eligible for extra pay under the Fair Labor Standards Act.


In the final rule that was announced Tuesday, the Labor Department is raising the "standard salary level" from the currently enforced level of $455 to $684 per week (equivalent to $35,568 per year for a full-year worker), as well as raising the total annual compensation level for "highly compensated employees" from the currently-enforced level of $100,000 to $107,432 per year.


It is also allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level, in recognition of evolving pay practices. In addition the rule revises the special salary levels for workers in U.S. territories and in the motion picture industry.


The final rule will take effect on Jan. 1, 2020. "For the first time in over 15 years, America's workers will have an update to overtime regulations that will put overtime pay into the pockets of more than a million working Americans," Acting U.S. Secretary of Labor Patrick Pizzella said in a statement. “This rule brings a commonsense approach that offers consistency and certainty for employers as well as clarity and prosperity for American workers.”


The Obama administration had proposed expanding overtime pay, but the proposed rule met with legal challenges and never took effect after being suspended by a federal judge in 2016. The last time the overtime regulations were effectively updated was back in 2004.


"Today's rule is a thoughtful product informed by public comment, listening sessions, and long-standing calculations," stated Wage and Hour Division Administrator Cheryl Stanton of the Labor Department. “The Wage and Hour Division now turns to help employers comply and ensure that workers will be receiving their overtime pay.”


The final overtime rule also updates the earnings thresholds that are necessary to exempt executive, administrative or professional employees from the Fair Labor Standards Act's minimum wage and overtime pay requirements. It enables employers to count a portion of certain bonuses (and commissions) towards meeting the salary level. The new thresholds account for growth in employee earnings since the currently enforced thresholds were set in 2004.


The Labor Department estimates that 1.2 million additional employees will be entitled to minimum wage and overtime pay thanks to the increase to the standard salary level and another 101,800 workers will be entitled to overtime pay as a result of the increase to the HCE compensation level, for a total of approximately 1.3 million who will benefit from the rule change.




Innovation meets regulation: The looming tax headache for Airbnb hosts

By Shaun Hunley


Rent your place, make some cash, and top it off with huge tax savings. Sounds too good to be true, doesn’t it? It just may be, because vacation rental property owners are finding out that their lofty dreams of taking their extra income and qualifying for a juicy tax deduction might be just that: a fantasy.


The qualified business income deduction — also known as Section 199A as part of the Tax Cuts and Jobs Act, which was signed into law in 2017 — has created plenty of potential landmines for tax professionals, and the close of another summer vacation season is a reminder of yet another.

In the sharing economy, vacation rental sites like Airbnb and HomeAway have become popular ways for real estate owners in desirable cities to make some extra money; in essence, a passive second business. To those property owners, it would only make sense that QBI would open up a way to take this “side hustle” and turn it into a business that qualifies for a tax deduction.


It seems logical on the surface, but like anything in the QBI world, it’s not as simple as it appears.


Safe, and strenuous, harbor

The entire idea of designating a home rental as a “business” is a new concept. Before the latest round of tax reform, most property owners didn’t want vacation rentals to be considered a formal business, because it would have subjected them to self-employment taxes, which come with a 15.3 percent tax on net income. Homeowners generally avoided the business label by not providing substantial services to guests.


But the QBI deduction changed that thinking. Under Section 199A, a business owner can realize a tax savings of up to 20 percent on business income. Additionally, half of the 15.3 percent self-employment tax can be claimed as a deduction on the owner’s income tax return. That’s a big carrot to dangle, but jumping through the hoops necessary to qualify for the QBI safe harbor is undoubtedly the stick.


Built into the QBI safe harbor are some rigorous requirements, including a mandate that vacation rental owners need to spend at least 250 hours in the calendar year providing rental services. Most do not exceed that threshold, and, even if they do, few are keeping track of their hours with time sheets and meeting minutes that prove they meet the threshold needed to qualify as a trade or business in the eyes of the IRS.


Doing the work

If property owners want to use the safe harbor, they are required to log all hours spent in the home by the various parties, as well as all services performed with respect to the rental and who performed them. In cases where vendors are hired — such as landscapers, housekeepers or maintenance companies — the property owner should file a Form 1099 for each vendor (for payments of $600 or more) if trade or business status is desired, something that is rarely done by casual vacation rental hosts.


None of these are recordkeeping tasks that can be fudged after the fact, nor should they be. The IRS can request to see those records, so it would be irresponsible for owners to simply file and hope their deduction goes unnoticed.


An owner also can’t solely rely on setting up a business entity, like an S corporation or LLC, to operate these properties, because that step alone does not automatically qualify a home rental “business” as a real business.


Uncertainty looms

It has yet to be seen how this will play out for vacation rental hosts who’ve been taking the QBI deduction without sweating the details. What we do know is that the IRS is always concerned about individuals accurately reporting their income, and if it appears that large numbers of vacation rental hosts are using the QBI deduction to game the system without the necessary requirements in place, they will start clamping down with audits.


Additionally, state-level authorities have been getting increasingly aggressive when it comes to enforcing rules around vacation rentals, taking measures to ensure they are subject to the same lodging taxes as traditional hotels and motels. It is highly likely that states that have information-sharing agreements in place with the IRS would even use QBI filing data to help enforce local tax collection requirements in their own regions.


To date, there are no tax court cases that provide a precedent on rental properties and the QBI deduction, but we do expect many of them to start appearing over the next few years.


For now, the key for property owners is recognizing that the initial Wild West phase of the sharing economy is no longer a novelty in the eyes of the IRS. If property owners aren’t hitting the 250-hour threshold, and aren’t prepared to do the work to prove the property’s business status, they may be better off looking for tax savings somewhere else.




IRS updates tax gap estimates

By Michael Cohn


The Internal Revenue Service released a new set of tax gap estimates Thursday for tax years 2011, 2012 and 2013, but they indicate the tax compliance rate is mostly unchanged from previous years.


The gross tax gap means the difference between true tax liability for a given period and the amount of tax that is paid on time. In the latest estimate, the IRS said the average gross tax gap is $441 billion per year for 2011, 2012 and 2013. But after late payments and enforcement efforts are factored in, the net tax gap was estimated at $381 billion.


The tax gap estimates indicate that approximately 83.6 percent of taxes are paid voluntarily and on time, which is mostly in line with recent estimates. A revised tax year 2008-2010 estimate is 83.8 percent. After enforcement efforts are taken into account, the estimated share of taxes eventually paid is 85.8 percent for both periods, which is line with the tax year 2001 estimate of 83.7 percent and the tax year 2006 estimate of 82.3 percent.


“Voluntary compliance is the bedrock of our tax system, and it’s important it is holding steady,” said IRS Commissioner Chuck Rettig in a statement Thursday. “Tax gap estimates help policy makers and the IRS in identifying where noncompliance is most prevalent. The results also underscore that both solid taxpayer service and effective enforcement are needed for the best possible tax administration.”


The IRS reiterated that it would continue to vigorously pursue people who aren’t compliant with their tax obligations. The IRS currently collects more than $3 trillion annually in taxes, penalties, interest and user fees. A one-percentage-point increase in voluntary compliance would bring in about $30 billion in additional tax receipts.




IRS offers safe harbor for rental real estate business deduction

By Michael Cohn


The Internal Revenue Service is giving rental real estate owners a safe harbor to allow them to claim interests in property as a qualified business deduction.


The IRS issued Revenue Procedure 2019-38 on Tuesday, finalizing a tax break under section 199A of the Tax Cuts and Jobs Act, giving owners of rental real estate the ability to claim the deduction, which can be up to 20 percent of income from a pass-through business. The revenue procedure provides a safe harbor permitting certain interests in rental real estate, including interests in mixed-use property, to be treated as a trade or business for purposes of the QBI deduction. A mixed-use property includes both commercial and residential space.


If all the safe harbor requirements are met, the IRS said an interest in rental real estate would be treated as a single trade or business for purposes of the section 199A deduction. Even if an interest in real estate doesn’t satisfy all the requirements of the safe harbor, it can still be treated as a trade or business for purposes of the section 199A deduction if it otherwise meets the definition of a trade or business in the section 199A regulations.



This safe harbor is available for taxpayers who want to claim the section 199A deduction with respect to a “rental real estate enterprise.” Only for purposes of the new safe harbor, the IRS is defining a rental real estate enterprise as an interest in real property held to generate rental or lease income. It may consist of an interest in a single property or interests in multiple properties. The taxpayer or a relevant passthrough entity that relies on the revenue procedure has to hold each interest directly or through an entity disregarded as an entity separate from its owner, such as a limited liability company with a single member.


The IRS listed the following requirements that need to be met by taxpayers or relevant pass-through entities to qualify for the new safe harbor:


  • Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise.
  • For rental real estate enterprises that have been around for less than four years, 250 or more hours of rental services are performed per year. For other rental real estate enterprises, 250 or more hours of rental services are performed in at least three of the past five years.
  • The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: hours of all services performed; description of all services performed; dates on which such services were performed; and who performed the services.
  • The taxpayer or relevant pass-through entity attaches a statement to the return filed for the tax year(s) the safe harbor is relied upon.


Earlier this year, the Treasury Department and the IRS issued a notice saying they were aware that whether an interest in rental real estate rises to the level of a trade or business for purposes of section 199A was the subject of uncertainty for some taxpayers. To help mitigate the uncertainty, they released for public comment in Notice 2019-07 a proposed version of a revenue procedure containing a safe harbor for treating a rental real estate enterprise as a trade or business solely for purposes of section 199A. The revenue procedure that was released Tuesday finalizes that guidance and spells out the procedural requirements for the safe harbor.




IRS expects big increase in information returns

By Jeff Stimpson


The IRS is projecting that it will see 12.4 percent more information and withholding documents in 2020 than it projected last year, driven largely by an increase in Forms 1099-B.


The projections were released today in Publication 6292, “Fiscal Year Return Projections for the United States, Fall 2019 Edition.”


This semiannual publication contains projections for Fiscal 2019 through 2026 of some 50 individual, business and tax-exempt return types, such as 1040, 1120, 941 and 990, to be filed by the major return categories. Also included are breakdowns by the IRS business operating divisions and an additional details by medium of filing (paper versus electronic) and actual number of returns filed for FY 2018.


Among the findings:


  • For calendar year 2020, the total number of information and withholding documents projected in this update is about 12.4 percent (463.9 million forms) more than the total projected last year. A major portion of the net revision is driven by the increase in the projections of 1099-Bs (i.e., 438.6 million more forms).
  • Also, for paper submissions of information returns processing documents, the 2020 estimate is about 6.9 percent less than the paper volumes projected in last year’s update. The change reflects a decrease of almost 3 million returns in the forecast of the number of paper 1099-MISCs filed.



Want to retire early – and not risk your future?

How to delay Social Security, boost benefits, and build an income bridge to get there.



Are you one of the many people who wonders if you could retire early, say, at 62 and enjoy a long retirement—on your own terms?


For a small percentage of people with very large nest eggs, pensions, and retiree health coverage, the answer is an easy yes. For many others, retiring early means finding ways to generate income from savings until they can claim Social Security at their full retirement age (FRA) or age 70 when benefits top out.


"If you're in your 50s and want to retire early, you'll need to have a plan along with several key financial building blocks in place," says Keith Bernhardt, vice president of retirement income solutions at Fidelity.


He adds, "Figure out your likely budget and living situation, make sure you are saving enough money to have your accounts ready to support a long retirement, and determine your income plans to cover your expenses. A big part of the income plan is nailing down your Social Security claiming strategy."


Increasing your lifetime Social Security benefit

Since Social Security is the only inflation-adjusted guaranteed source of income most people have throughout their retirement, wouldn't it make sense to maximize your Social Security income by waiting to claim until FRA or even age 70?


If you start taking Social Security at age 62, rather than waiting until your FRA, typically 66 to 67 depending on your birth year, you can expect up to a 30% reduction in monthly benefits with lesser reductions as you approach FRA.


Waiting to claim your Social Security benefit will result in a higher monthly benefit. For every year you delay past your FRA, you get an 8% increase in your monthly benefit. That could be up to a 24% higher monthly benefit if you delay claiming until the maximum age, which is 70.


Tip: Delaying your claim may not be right for everyone. Make sure to evaluate your claiming decision based on how much you've saved for retirement, your investment strategy, your other sources of income in retirement, and your expectations for longevity.


How long will I live?


This is not an easy question to answer. That's why it's important to plan for different scenarios (your advisor can help you evaluate the various planning options). Health status, longevity, and retirement lifestyle are 3 key factors that can play a role in your decision on when to claim your Social Security benefits.


While these variables are hard to predict with certainty, you can rely on the simple fact that if you claim early versus later, you will likely have lower benefits from Social Security to help fund your retirement over the next 20–30+ years.


Bottom line: If you don't have sufficient savings and need Social Security income to pay for your regular expenses immediately— or if you don't have longevity in your gene pool and are managing a number of health issues, it may not make sense to delay claiming Social Security. Otherwise, delaying as long as possible until 70 is generally the better strategy.


Meet Sasha: A 60-year-old who plans to retire in 2 years


Let's consider the hypothetical scenario for Sasha who recently celebrated her big "six-oh" (60th) birthday. She's single, still working, and currently earns $100,000 per year. She has saved $600,000 in her 401(k) and also has accumulated another $200,000 in her brokerage account (which includes 6 months of emergency savings). She intends to retire at 62 and expects to live until age 95 for retirement planning purposes.1 (Why plan to age 95? Because 1 of 3 women who make it to age 65 will live to age 90 and 1 of 7 women who reach age 65 will live past age 95, according to Her retirement expenses are currently estimated to be $3,300/month for essential (must-have) expenses and $1,000/month allocated to discretionary (nice-to-have) outlays.


First, let's examine the basics. If Sasha claims Social Security at age 62, she'd receive approximately $1,963 a month. If she waits until 67,3 she’ll get 43% more, or $2,808 a month. If she waits until age 70, her monthly benefits at $3,474 per month will be 77% greater than if she claimed at age 62. If she lives until 95, her lifetime benefits from Social Security would top $1 million (see charts below).


Sasha’ estimated monthly Social Security Benefit

Chart shows that Sasha's estimated monthly income would be $1,963 if she claimed Social Security benefits at age 62; $2,808 if she claimed at age 67, and $3,474 if she claimed at age 70.


For illustrative purposes only. All figures are in today's dollars. The planning assumption is that she will live to age 95.


Sash’s estimated lifetime cumulative Social Security benefit

Chart shows that Sasha's estimated lifetime cumulative income would be $777,348 if she claimed Social Security benefits at age 62; $943,488 if she claimed at age 67, and $1,042,200 if she claimed at age 70.

For illustrative purposes only. All figures are in today's dollars. The planning assumption is that she will live to age 95.


Big concern for many retirees: Risk of running out of money

Claiming your Social Security needs to be considered within the broader context of evaluating how much income can be generated by your retirement accounts, other personal savings, and additional sources of income. One of the most common questions that customers ask a Fidelity advisor is: How long will my money last in my retirement? Of course, there are a myriad of variables to consider, so planning out different options is a good idea. Here are 3 ways that it could play out for Sasha:


  1. If she stops working and claims Social Security early at age 62  

a. She will have to start drawing down her savings sooner and need to withdraw more to make up for her reduced Social Security benefits.

b. In this estimate she winds up with $11,926 in assets in her retirement plan at age 95.

  1. If she delays claiming until her FRA of 67

a. She still has to withdraw from her savings to cover expenses between 62 and 67, but then she can withdraw less once she starts collecting Social Security.

b. In this case she will have amassed $237,886 at age 95, after continuing to pay essential and discretionary expenses.

  1. If she delays claiming Social Security to age 70 (the last possible age)
    a. She will have an estimated $321,204 in her retirement plan at age 95.
    b. She will also have 142% more lifetime income than if she claimed at 62. (see below).


Sasha’s estimates for claiming Social Security at age 62 vs. 67 vs. 70


Cumulative income from Social Security

Account balance remaining in Sasha’s retirement plan at age 95

Scenario 1
Claim Social Security at age 62



Scenario 2
Claim Social Security at age 67



Scenario 3
Claim Social Security at age 70





Note: These amounts are estimates. Actual results will be different. The estimates assume she does not end up in a nursing home or have other large-scale expenses at an advanced age. All of these scenarios assume a relative consistent set of expenses year to year. The 2nd and 3rd scenarios would result in more money available should there be large expenses, perhaps related to health care, later in life.


But how do you use retirement savings to bridge an income gap between when you retire and when you can maximize your Social Security benefit? You might be able to cut spending or boost income, perhaps by taking on part-time work or generating rental income if you own real estate. But if those strategies don’t produce enough income, here are 3 investment options to consider, along with some pros and cons.


3 ways to help bridge an income gap to Social Security

1. Withdrawal from savings

A simple approach to providing income until you claim Social Security is a plan to make periodic withdrawals from your savings. You can automatically take money out of Fidelity (or other) accounts on a regular basis (monthly, quarterly, yearly) to help pay for your ongoing expenses in retirement.


Remember, you may have to sell securities on a regular basis and, if taken from an IRA or 401(k), your withdrawals will typically be taxed depending on the type of account. Consider working with an advisor to determine the timing, sequence, and amounts from your different accounts (taxable, tax-deferred, and after-tax).


Tip: We suggest planning conservatively, so you may want to compare how long your savings might last in a good market vs. bad market. Read Viewpoints on 3 ways to manage your retirement withdrawals


2. Deferred or immediate period certain annuity

Another option to consider is a deferred period certain annuity5. It's an insurance contract designed to pay a fixed amount of income, with a specific start and end date (a certain period of time). If you want to delay the claiming of Social Security benefits from say, age 62 to age 70, you could purchase this type of annuity several years before your retirement date (typically 5 to 10 years before you are ready to retire). Then it would start making payments when you turn 62 and end 8 years later when you reach age 70.


A period certain annuity offers an income guarantee, no matter what economic or market conditions you may be faced with over the length of the period you select. Like other annuities, this shifts market risk off your shoulders and onto the issuing insurance company, but you will have limited flexibility to withdraw the money to address emergency expenses with this portion of your money.


Similar to a deferred income annuity you may consider an immediate income annuity which starts your income within 12 months of your investment versus having a deferral period. In the event you experience an unexpected lifestyle change and are no longer working, an immediate income period certain annuity provides guaranteed income for a specific period of time until you claim Social Security.


Tip: Planning ahead with a deferred income annuity may be worthwhile since they usually provide a higher income amount, for the same investment amount, than an immediate income annuity. Read Viewpoints on Early unplanned retirement and Create future retirement income


3. Bond or CD ladder

If you tend to be a DIY investor and have experience purchasing bonds or CDs, you might consider a bond or CD ladder. To create a predictable income stream that serves as a short-term bridge, you could buy a series of bonds or CDs with maturity dates that extend into the future and span the period of the bridge. The bonds or CDs pay a fixed income from their coupons and the return of principal as each bond matures.


Although some bond ladder strategies involve replacing maturing bonds with new bonds, under the bridge strategy, maturing bonds contribute toward the income stream. Say you need a 10-year bridge to Social Security. Starting at age 60, you would buy a series of bonds or CDs that mature each year from the age of 61 until age 70.


By holding the bonds to maturity, you can receive the full income from the coupons and maturing principal during the years you want to supplement your cash flow.


Remember, while the final maturity value of your bonds will be predictable in advance, before the bonds mature they could vary in value, either up and down. When you hold each bond to maturity, the funds are paid back to you and the payout should be what you originally expected.

The advantage of a ladder over an annuity is that you have access to your money. However, there are no income guarantees, and maintaining a bond ladder takes time and attention. If you do not have the skill, will, and time, you might want to consider professional management.

Read Viewpoints on How and why to build a bond ladder


Quick Look: Pros and Cons of 3 bridge strategies

Withdrawals from savings plan


  • Liquidity: You can tap the money whenever you want
  • Potential growth in an up market
  • Keeping your asset mix in place


  • Market risk
  • No return guarantees
  • Maintenance of the withdrawals (unless they are fully automated)

A period certain income annuity


  • Guaranteed level of future income
  • Can fund with either qualified or non-qualified assets6
  • Simplicity and ease of receiving automatic monthly payments deposited directly to your bank account


  • No access to principal (but some flexibility to accelerate income payments)
  • No participation in the broader market
  • Inflation risk (for longer bridge periods)

Bond or CD ladder


  • Predictability of income
  • CDs are FDIC-insured and Treasury bonds are backed by the US Government
  • Zero cost for CD ladders using new issue CDs


  • Potentially lower returns than with an annuity or conservative portfolio
  • Complexity of implementation and maintenance
  • Inflation risk (for longer bridge periods)



In summary, the advantage of annuities is guarantees*, but you can't withdraw the principal, and only have limited flexibility to accelerate income payments if you need access. When looking at total income, annuities and bond ladders would generally perform better than automatic withdrawal from savings in poor markets, while a withdrawal approach would offer the potential to outperform the other options in strong markets.


Plan ahead

What strategy is best for you? That depends on your priorities, early retirement options, and your stomach for market ups and downs, among other factors.


For many people, delaying Social Security can help forge a solid retirement. But, you can't wait until age 62 to figure it out. Bridge strategies can be complex, so consider working with a professional early to weigh your options and build a plan.


"Ideally, you should begin working with your Fidelity advisor 5 to 10 years before you plan to retire," says Bernhardt. "Together, you can explore options to help you generate income in a way that meets your early retirement goals while keeping you on track to fund your longer-term retirement needs."



IRS urged to use data to uncover charity-related tax scams

By Michael Cohn


The Internal Revenue Service could make better use of its data to ferret out abusive tax schemes involving charities and other tax-exempt groups, including syndicated conservation easements, according to a new report.


The report, from the Government Accountability Office, found the IRS doesn’t consistently analyze data from its existing databases to help identify these kinds of tax scams.


The report noted that some abusive tax schemes could involve multiple donors grossly overvaluing their charitable contributions, and the tax-exempt entity might not even be part of the scheme. In another example, some patient assistance programs — which can help patients obtain medical care or medications — have been used by drug makers to make charitable donations that can be viewed as furthering private interests.


However, IRS audits of abusive tax schemes have been trending downward in recent years in the wake of budget cuts and staffing reductions, corresponding with an overall decline in audit activity by the IRS.


Still, the IRS has various programs that could work together collectively to identify abusive tax schemes involving tax-exempt entities, but there are some internal control weaknesses in their approach. The GAO found three ways that IRS data or programs were inconsistent with the federal government’s internal control standards for using quality information.


“First, database project codes used for identifying data on abusive tax schemes are not linked across IRS's audit divisions and do not consistently identify whether a tax-exempt entity was involved,” said the report. “Second, IRS has not leveraged a database with cross-divisional information to facilitate its analysis and monitoring of audit data across divisions. Finally, IRS has not used existing analytic tools to mine the narrative fields of tax forms. Doing so could provide audit leads on abusive schemes involving tax-exempt entities. These deficiencies inhibit IRS's ability to identify abusive tax schemes and develop responses to those schemes.”


One area where there appears to be abuse is in syndicated conservation easements. A conservation easement is a legal agreement giving an organization the right to restrict the development and use of property for conservation purposes with the goal of preserving the land or buildings. If the statutory requirements are met, taxpayers are able to donate an easement to a qualified organization and receive a charitable income tax deduction for the appraised value of the easement. A conservation easement can be “syndicated” if a person or company promoting the easement offers multiple investors in a partnership or pass-through entity the opportunity to claim charitable deductions based on the value of the easement in return for cash. The Brookings Institution estimated that investments in syndicated conservation easements totaled $623 million in 2016, a 29 percent jump from $484 million in 2015. The study estimated that because tax deductions from syndicated conservation easement contributions generate a benefit greater than the value of the investments themselves, the tax deductions resulted in a federal tax revenue loss of between $1 billion and $1.9 billion in 2015 and between $1.3 billion and $2.4 billion in 2016.

The GAO made five recommendations in the report for strengthening the IRS’s internal controls, suggesting the agency link its data across operating divisions, test the ability of a database to facilitate analysis of audit data, and use its existing analytic tools to mine more information from tax forms. The IRS agreed with all five of the GAO's recommendations.


“The Internal Revenue Service has long worked to combat abusive tax avoidance transactions,” wrote Kirsten B. Wielobob, deputy commissioner for services and enforcement at the IRS, in response to the report. “As noted in your report, we designated certain syndicated conservation easements as listed transactions in 2016. We are actively examining cases that represent billions of dollars in charitable contribution deductions. These abusive conservation easement syndicate transactions undermine the public’s trust in private land conservation and erode the public’s confidence in the tax system, and we are committed to addressing this and other abuses.”


She added that the IRS’s strategic plan includes advancing the use of data to improve decision-making and outcomes, and one way that can be used is with a risk assessment of the under-filing of Form 8866-T, which tax-exempt entities are supposed to use to disclose any prohibited tax shelter transactions. The GAO report noted that the filing of these forms, which involve paying an excise tax, is far lower in volume than the filing of the Form 8866, “Reportable Transaction Disclosure Statement,” which doesn’t involve reporting a tax liability. The GAO had pointed to that as a way to uncover tax schemes, but Wielobob noted that the numbers aren’t necessarily comparable.




Supreme Court lets New York taxes on part-time residents stand

By Greg Stohr


The U.S. Supreme Court left intact New York’s rules for taxing people who work in the state but live there only part-time, rejecting two appeals including one filed by the founders of Edelman Shoe Inc.


The appeals argued unsuccessfully that New York is violating the Constitution by denying credits for some taxes paid in other states by people with dual residences. Critics said New York is improperly collecting millions, if not billions, of dollars, much of it from people who primarily live in Connecticut.


The fight involved so-called intangible income, which includes proceeds from the sale of a business. Dual residents who pay taxes elsewhere on intangible income get a credit in New York, but only if the money is derived from economic activities in the other state. The system means taxpayers in some cases might have to pay levies twice on the same income.


One of the cases involved the 2010 sale of Samuel and Louise Edelman’s shoe business to Brown Shoe Co., now known as Caleres Inc. The Edelmans paid taxes to Connecticut on the sale.


At the time, the Edelmans lived primarily in Connecticut but worked in Manhattan and had an apartment in the city. New York considered the Edelmans to be residents under that state’s law because they spent more than 183 days there. The couple was fighting an assessment of more than $6 million in back taxes.


Interstate commerce

The other case concerned Richard Chamberlain and Martha Crum, who were fighting a $2.7 million assessment stemming from their 2007 sale of Chamberlain’s communications company. Like the Edelmans, the couple lived mainly in Connecticut but had a townhouse in New York City and worked there.


The appeals contended that New York is discriminating against interstate commerce. The couples said the assessments can’t be squared with a 2015 Supreme Court ruling that a Maryland couple was being improperly double-taxed on income the husband received from a company he partially owned. That company was based in Maryland but earned income from other states.

New York officials urged the Supreme Court to reject the appeals. The state said it provides the type of tax credit that was missing in the Maryland case, shielding taxpayers when the income stems from commercial activity in another state. New York state courts upheld the assessments.

The cases are Chamberlain v. New York State Department of Taxation and Finance, 18-1569, and Edelman v. New York State Department of Taxation and Finance, 18-1570.




IRS sets new voluntary per-diem rates

By Jeff Stimpson


The IRS has published a notice of which per diem rates taxpayers should use as of October 1, 2019.


The per diem rates are used to substantiate the amount of expenses used for lodging, meals and incidental costs when traveling away from home, including:

  • The special transportation industry rate;
  • The rate for the incidental expenses only deduction; and,
  • Rates and list of high-cost localities for purposes of the high-low substantiation method.


Use of a per diem substantiation method is not mandatory. A taxpayer may use actual allowable expenses if they maintain adequate records or other sufficient evidence for substantiation.




5 Social Security myths debunked

Focus on the facts before you claim this valuable retirement income benefit.



Key takeaways

  • Many people believe that everyone must claim their Social Security benefits at age 62. That is a myth: 62 is the earliest age you can claim your benefit, but it’s not the only age.
  • Waiting to claim Social Security until after your full retirement age (FRA) comes with a bonus: 8% additional monthly income per each year you wait.
  • Your ex-spouse has no influence over your benefits.
  • If you were married for 10 consecutive years and have not remarried, you are entitled to either your own benefit—or 50% of your ex’s Social Security benefit, whichever is higher—once you reach your FRA.



Getting your arms around Social Security can be pretty complicated. Misinformation, partially informed opinions, and complex benefits formulas can easily lead one down an incorrect—and costly—path. That's why it is important to work with your financial advisor to develop a Social Security claiming strategy that can serve as the foundation of your overall retirement income plan.


Before you make your decision about claiming this valuable benefit, let's clear up 5 of the most common myths and misperceptions about Social Security that could undermine your ability to generate the income you’ll need in retirement to live the life you want.


Myth #1: You must claim your Social Security benefit at age 62

Many people are adamant that Social Security benefits must begin at age 62. This is a myth: 62 is the earliest age you can claim your benefit, but it's not the only age.


Your base benefit is calculated based on your "full retirement age," or FRA. Your date of birth determines your FRA. Your base benefit is calculated by the Social Security Administration based on your average indexed monthly earnings during the 35 years in which you earned the most (only the years that you paid Social Security taxes).


Tip: You'll find your FRA at Social Security's website, SSA.govOpens in a new window, or on a paper statement mailed to you by the Social Security Administration. For those born between 1943 and 1954, your FRA is 66. Those born later have an FRA of 66 (plus some months) or an FRA of age 67.


If you claim any time before your FRA, you lock in a permanent reduction in monthly income. Claiming at 62 translates to a reduced monthly income of 25% to 30%, depending on your FRA. That means you may receive a lot less monthly retirement income, every year, for potentially several decades. You might think you are not going to live a long life, but many people do: For people age 65 today, 25% of men will live until 93; 25% of women will live to 95.1 A key consideration for when you claim Social Security is maximizing your income for a retirement that could last longer than 30 years.


Wait until age 70 and lock in a "bonus":

  • Waiting to claim Social Security until after your FRA comes with a hefty bonus: 8% additional monthly income per each year you wait.
  • If your FRA is 66, your monthly income would increase 32% by waiting.
  • If your FRA is 66 years and 6 months (if you turn 62 in 2019), your monthly income would increase 28% by waiting.
  • If your FRA is 67, your monthly income would increase by 24% waiting.



Myth #2: You'll never get back all the money you put into the program

Although 70% of the respondents from our survey2 thought they might not get back all the money they put in, many will. Everyone’s situation is different. Simply put, if you live a long time, you may collect more than you contributed to the system.


Due to the complexity of claiming strategies and number of variables involved, the Social Security Administration no longer offers a break-even calculator on its website. Social Security is designed to provide a safety net of income for the retired, the disabled, and survivors of deceased insured workers. The contributions you and your employers make during your working years provide:


  1. Current retirees and other Social Security recipients with payments
  2. A guaranteed income benefit when you reach retirement


While the government does not have a specific account set aside just for you with your FICA contributions (the taxes for Social Security and Medicare paid by you and your employer), one of the most powerful features of Social Security is that it provides an inflation-protected guaranteed income stream in retirement, ensuring against the risk you will outlive your savings. Even if you live to 100 or more, you continue to receive income every month. And, if you predecease your spouse, your spouse also receives survivor benefits until their death.


Myth #3: My ex-spouse's actions could negatively impact my Social Security benefit

In a survey,3 Fidelity asked more than 1,000 people if an ex-spouse could influence their Social Security benefits—52% of them said yes, this is true.

The real answer: False.


There are a lot of things an ex-spouse might do to complicate your life, but Social Security is off limits. Your ex has no influence over your benefits. If you have an ex-spouse, you may be entitled to spousal benefits as if you had remained married. If you were married for 10 consecutive years and have not remarried, you are entitled to either your own benefit—or 50% of your ex's Social Security benefit, whichever is higher—once you reach your FRA.


If you wish to claim on your ex-spouse's benefit, you simply make an appointment with your local SSA office and bring documents that prove the marriage and divorce. They will calculate your benefit options, and when you submit your claim, you’ll receive the higher benefit.


Tip: There's no need to discuss this with your ex-spouse, and your claim does not reduce or affect your ex's benefit in any way. It's your benefit, even if you've been divorced for many years. And, it may be larger than your own individual benefit. Read Viewpoints on Unraveling Social Security rules for ex-spouses


Myth #4: Your benefits are only based on wages that you've earned before age 65

How your Social Security benefit is calculated can seem mysterious. However, it’s important to know a few essential facts to aid your claiming strategy. You can use the tools on SSA.govOpens in a new window to do the calculations.


  • Your benefit is calculated based on your highest 35 years of earnings; they do not have to be consecutive years or before age 65.
  • If you work past age 65, those earning years will be included, so long as they are high enough to be part of your highest 35 years.
  • Even working part-time after turning 65 may be part of your highest 35 years of earnings.
  • To be eligible for Social Security, you must have a minimum of 10 years of covered employment, which equates to 40 credits in the Social Security system.
  • If you don’t have 35 years with earnings, zeros will be included in the calculation.


Myth #5: You can claim early, then get a "bump up" once you reach full retirement age

Many believe there is a "bump up" or "added income" once they reach their full retirement age. They've heard they can claim early at 62, then when they reach 66 or older, their checks will increase to the amount that corresponds to their full retirement age benefit. That's a big misperception.


There is no bumping up of income once you've claimed your Social Security retirement benefit. However, anyone receiving a benefit can voluntarily "suspend" that benefit after they reach FRA and resume it as late as age 70. If they do, the annual benefit will increase by 8% until age 70. After that, you get an annual cost of living adjustment, but no increase in your base benefit, which will start automatically the month you reach age 70 unless you specify otherwise.


In general, you can cancel your Social Security claim if you do so within the first 12 months of receiving benefits.2 You must repay the full amount you've received, and the full amount a current spouse or family member received based on your benefit. Then, you are eligible to claim again at a later date and will receive a larger monthly payment. Each individual can only cancel a claim once in their lifetime.


Case Study: Lower-income spouses may get a "top up" or "auxiliary" benefit.

There is, however, one case where you could get a "top up" benefit at FRA, but you still need to wait until your FRA to claim your Social Security benefit. In this hypothetical example, Sally earned less during her career than her husband Brad. Her FRA benefit is $700 per month; his is $2,000. As a spouse, she's entitled to 50% of Brad's benefit if she claims at her FRA. She would receive a "top up" of $300 to bring her benefit up to the $1,000 (half of Brad's benefit) to which she is entitled. Social Security will calculate her options and pay out the higher benefit to which she is entitled.

True of false?  If you work past age 65, your Social Security benefit is based only on earnings up to age 65.  The answer is false.



Social Security: Your contributions vs. potential benefits

Let's look at a hypothetical case of Steve, who reached his FRA in 2018. He retired in December 2018 and began collecting his Social Security benefit in January 2019 at his FRA. In Steve's case, if he lives past age 76½, he will receive a larger benefit than he contributed to the system. There is no standard break-even point, but let's look at Steve's situation in more detail.


Steve’s situation:

First year of work


Gross annual income in 1974


Gross annual income in 2018


Steve's OASDI* taxes paid


Employer's total OASDI contribution


Steve's total OASDI contribution


Steve's estimated benefit at FRA

$2,678 per month

*Old Age Survivor Disability Insurance


If Steve lives until age

Total Social Security benefits (not COLA-adjusted, rounded to nearest $1,000)

Percentage of Steve's total OASDI contribution











For illustrative purposes only. COLA = Cost of living adjustment. OASDI contribution: Old Age Survivor Disability Insurance, a 6.2% payroll tax, which is part of overall FICA employee payroll withholdings. Hypothetical case assumes a final year of wages in 2018 to be $110,000. Using the Social Security calculator built by Fidelity, a rough estimate of benefits was calculated at FRA in today’s dollars. For an estimate using your personal earnings history, go to SSA.govOpens in a new window.


Checklist for your Social Security claiming strategy


Start planning early

Claiming Social Security is an important part of your retirement income plan, but it takes some time to understand the options—and the implications to your savings. Social Security can form the bedrock of your retirement income plan. That's because your benefits are inflation-protected and will last for the rest of your life. Consider working with your Fidelity financial advisor to explore options on how and when to claim your benefits.



IRS issues more guidance on cryptocurrency

By Jeff Stimpson


The IRS has issued additional guidance on common questions regarding the tax treatment of a cryptocurrency hard fork (when a single cryptocurrency splits in two).


new set of FAQs also addresses virtual currency transactions for those who hold it as a capital asset.


Some taxpayers with virtual currency transactions may have failed to report income or did not report transactions properly, the IRS admits. The agency’s responses have ranged from taxpayer education to audits to criminal investigations. The techno-currencies has created a series of questions for many preparers.


The new guidance supplements the guidance on virtual currency in Notice 2014-21. In Notice 2014-21, the IRS applied general principles of tax law to determine that virtual currency is property for federal tax purposes.


The IRS is seeking public comment on other types or aspects of virtual currency transactions. Address comments to: IRS, Attn: CC:PA:LPD:PR (Notice 2014-21), Room 5203, P.O. Box 7604, Ben Franklin Station Washington, D.C. 20044. Comments may also be emailed to, with “Notice 2014-21” in the subject line.




IRS revises Form 1040 schedule to ask about virtual currency

By Michael Cohn


The Internal Revenue Service has issued a second early draft version of the new Schedule 1 for next tax season’s Form 1040 to include a question up top about whether a taxpayer has sold, received, exchanged or acquired cryptocurrencies such as Bitcoin or Ethereum.


The question asks, “At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” It then offers the options of answering either yes or no.


The IRS said in an email to tax professionals Friday that taxpayers who file Schedule 1 to report income or adjustments to income that can’t be entered directly on Form 1040 should check the appropriate box to answer the question about virtual currency. Taxpayers don’t need to file Schedule 1 if their answer to this question is no and they don’t have to file Schedule 1 for any other purpose.


The related draft Form 1040 instructions are also now available on, and they include instructions to help taxpayers determine how they should answer this new question.


Earlier this week, as part of a larger effort to help taxpayers and tax professionals deal with cryptocurrencies like Bitcoin, and to enforce the tax laws in this rapidly changing area, the IRS issued two new pieces of guidance for taxpayers who engage in transactions involving virtual currency, including Revenue Ruling 2019-24 and frequently asked questions (see IRS issues more guidance on cryptocurrency). The new guidance supplements the original guidance the IRS issued back in 2014 on virtual currency in Notice 2014-21 that describes how virtual currency is treated for federal tax purposes.


The new revenue ruling deals with some common questions by taxpayers and tax practitioners regarding the tax treatment of a cryptocurrency hard fork, soft fork and airdrop. The set of FAQs explains virtual currency transactions for those who hold virtual currency as a capital asset.

The IRS said it will accept comments on the new draft Schedule 1 at for a 30-day comment period beginning Oct. 11.


The IRS added Schedule 1 to the Form 1040 last tax season as a way to shorten the main Form 1040 in line with the Tax Cuts and Jobs Act. This past tax season it had six numbered Schedules 1-6 supplementing the Form 1040, but next tax season that will be reduced to three extra numbered Schedules 1-3, in addition to the traditional lettered schedules like Schedules A, B and C.




Organizations increasingly vulnerable to fraud

By Michael Cohn


Companies lack adequate anti-fraud staff and resources and are seen as more likely to fall prey to fraud than in the past, according to a new report.


The report, released Thursday by the Association of Certified Fraud Examiners at a Fraud Risk Management Summit in New York, polled 886 ACFE members and found that 49 percent of the respondents believe their organizations are more vulnerable to external frauds now than in the past, compared to 38 percent of respondents who note the same about occupational fraud.

Meanwhile, 58 percent of organizations currently have inadequate levels of anti-fraud staffing and resources, according to the respondents.


"Without adequate resources or staff, fraud examiners are limited to how much they are able to sufficiently investigate and stop fraud," said ACFE President and CEO Bruce Dorris in a statement. "Each day that a fraud scheme is able to continue, the victim organization is losing money to a situation that could likely be prevented."


Embezzlement is a common form of fraud, with 72 percent of teams frequently or occasionally investigate employee embezzlement, making it the most common type of fraud investigated.

Fraud investigators in the insurance industry have the largest caseload, with an average of 17 cases at any given time, while those in the mining industry have the smallest average caseload of two cases. Organizations in the government and public administration sectors typically have the longest fraud investigations, with teams taking an average of 94 days to close a case.


Companies are aiming to beef up their efforts to beat back fraud, with 60 percent of the respondents polled saying their organizations expect to increase their investments in anti-fraud programs in the next two years. However, 15 percent of the organizations in the survey typically don’t recover any of their funds lost to fraud, while another 64 percent recover less than half of their losses, according to the report.


“It is important to benchmark current anti-fraud efforts globally, across industries and within organizations of different sizes in order to get a holistic picture of how organizations are tackling fraud,” Dorris stated. "This data allows organizations to evaluate the effectiveness and efficiency of their anti-fraud initiatives, as well as to identify areas for improvement, expansion or investment.”



IRS lagging on implementing its plan to speed corporate audits

By Laura Davison


The Internal Revenue Service isn’t effectively auditing corporations despite a change in how the agency conducts tax examinations that was supposed to make the process more efficient, according to the agency watchdog.


The IRS is only using the new audit selection system for about 15 percent of audits of large businesses and international companies, according to a report Thursday from the Treasury Inspector General for Tax Administration. The remaining audits are coming from old processes that take more time and cost more for the IRS to conduct.


The agency in 2016 announced a new system for selecting cases to audit. The IRS said it would focus on examining high-risk transactions, rather than auditing a company’s entire tax return as part of an effort to more efficiently enforce tax laws.


The IRS is also failing to use the results of past audits to select and prioritize future cases to examine, the report said. The agency said it is using data to manage its audit caseload and that initial results shouldn’t be used to scrap the program.


“We agree that these results, also described by IRS management as lackluster, should not be used to assess the success or failure of the program as a whole,” the IRS Office of Audit said in response to the Inspector General analysis.


The report illustrates how the IRS has struggled to ensure tax compliance in recent years. The number of revenue agents fell to 2,923 in 2018, from 5,224 in 2010, as budget cuts and hiring freezes have impeded the agency’s audit capability.


“Given the diminished examination resources, the IRS should be even more focused on emphasizing areas that have the highest compliance risk,” the report said.


The IRS also said that staff and resources were allocated to work on implementing the 2017 tax law in 2018 and 2019, directing funds away from the audit program.


This isn’t the first time the IRS has received a negative report about how it is auditing corporations. In September, the Inspector General released a report saying IRS employees had collectively spent nearly 28,000 work days over a four-year period auditing mergers and acquisitions that ultimately yielded no additional tax revenue.




IRS warns of Social Security Number Cancellation Scam
By Michael Cohn


The Internal Revenue Service is cautioning taxpayers and tax professionals to beware of a new twist on an old scam in which fraudsters call up victims and threaten to cancel their Social Security number if they don’t pay their taxes.


“In the latest twist on a scam related to Social Security numbers, scammers claim to be able to suspend or cancel the victim’s SSN,” said the IRS in an email to tax professionals Thursday. “It’s yet another attempt by con artists to frighten people into returning ‘robocall’ voicemails. Scammers may mention overdue taxes in addition to threatening to cancel the person’s SSN. If taxpayers receive a call threatening to suspend their SSN for an unpaid tax bill, they should just hang up. Make no mistake…it’s a scam.”


The IRS warned taxpayers not to provide sensitive personal or financial information over the phone unless they’re positive they know the caller is legitimate. When in doubt, they should hang up the phone.


The IRS has begun using private collection agencies to help collect tax debts, but the IRS said the debt collection agencies will never call to demand immediate payment using a specific payment method such as a prepaid debit card, iTunes gift card or wire transfer (the IRS doesn’t use these payment methods). Similarly, legitimate IRS private debt collection agencies won’t ask a taxpayer to make a payment to a person or organization other than the U.S. Treasury, or threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying. They also aren’t supposed to demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.


Taxpayers who don’t owe taxes and have no reason to think they do should report the call to the Treasury Inspector General for Tax Administration and report the caller ID and callback number to the IRS by sending it to The taxpayer should write “IRS Phone Scam” in the subject line. They should also report the call to the Federal Trade Commission. When reporting it, they should add “IRS Phone Scam” in the notes.


Taxpayers who owe taxes, or think they owe taxes, can view their tax account information online to see the actual amount owed and review their payment options. Alternatively, they can call the number on the billing notice, or call the IRS at (800) 829-1040.




House passes corporate transparency bill

By Michael Cohn


The U.S. House of Representatives passed a bill that would force anonymous shell companies to disclose their actual ownership.


The Corporate Transparency Act would require companies to disclose their true, beneficial owners at the time the company is formed to prevent anonymous shell companies from evading law enforcement and hiding illicit activities. It passed on a bipartisan vote of 249 to 173 Tuesday evening.


Before the vote, the White House endorsed the measure, saying “this legislation represents important progress in strengthening national security, supporting law enforcement, and clarifying regulatory requirements.”


The bill now moves to the Senate, where similar bipartisan legislation is co-sponsored by close to one-third of the key Senate Committee on Banking, Housing, and Urban Affairs. The chair and ranking member of the Banking Committee have indicated the issue is a priority.


“The illicit use of anonymous shell companies is one of the most pressing national security problems we currently face,” said Rep. Carolyn Maloney, D-N.Y., who introduced the legislation. “They are being used by money launderers, criminals, and terrorists — but we can stop that. We’re the only advanced country in the world that doesn’t already require disclosure of this information — and frankly, it’s an embarrassment.”


She introduced the bill in May with Rep. Peter King, R-N.Y., and Tom Malinowski, D-N.J. The bill would close loopholes that enable traffickers, corrupt officials, terrorists and other criminals to hide, launder, move and use their money. This legislation requires corporations and limited liability companies to disclose their beneficial owners to the Financial Crimes Enforcement Network. The COUNTER Act, sponsored by Rep. Emanuel Cleaver, D-Missouri, was added to the bill through an amendment, and would close loopholes in the Bank Secrecy Act, increase penalties for those who break the law, and give financial institutions new tools to fulfill their obligations.


“After more than a decade of debate to bring anti-money laundering protections into the modern era, Congress just took an enormous step forward,” said Gary Kalman, executive director of the Financial Accountability and Corporate Transparency Coalition, in a statement. “Make no mistake, this is an historic vote. Anonymous companies are widely recognized as the single most dangerous and significant gap in our anti-money laundering framework. ... Treasury’s pilot efforts in collecting ownership information have already demonstrated the incredible impact of this reform.”


"This legislation stops human traffickers, corrupt government officials and revenue loss in the developing world,” stated Eric LeCompte, executive director of the group Jubilee USA. “The Senate must now pass this vital legislation."




IRS warns against charity fraud

By Jeff Stimpson


The Internal Revenue Service has joined an international coalition for the second annual International Charity Fraud Awareness Week.


Through Oct. 25, 2019, the coalition looks to raise awareness and share practices to help charities and other nonprofit organizations avoid fraud and stop financial crime. Accountants, auditors and professional advisors to nonprofits are encouraged to participate, as are trustees, staff and volunteers from charities, non-government organizations and other nonprofits.


ICFAW is led by a coalition of over 40 charities, regulators, law enforcers, representative bodies and other nonprofit stakeholders. More information is available at the Fraud Advisory Panel website and on social media at #CharityFraudOut.




Sustainability standards seen as too fragmented

By Michael Cohn


Environmental, social and governance reporting is filled with competing sets of sustainability-related standards that are in need of simplification and consolidation, according to accounting standard-setters and experts.


“What we need in the world of ESG is a convergence project,” said International Accounting Standards Board Chairman Hans Hoogervorst during an event in New York on Wednesday evening hosted by the IFRS Foundation and the CFA Institute. “ESG reporting is countless initiatives. I said in a speech there has to be consolidation among so many standard-setters.”

“I think it would be great if those standard-setters make the world a little bit simpler for users,” he added. “It’s too much now.”


Robert Pozen, a senior lecturer at the MIT Sloan School of Management who chaired the SEC’s Advisory Committee on Financial Reporting in 2007-2008, noted that there are at least 230 sustainability initiatives.


“Think about these companies that are trying to report under sustainability,” he said. “There are so many different groups here. The EU has followed, as they usually do, a principle-based approach, which has certain virtues, like allowing innovation, but it also leaves guidance pretty imprecise. If you look at the U.S., we have the Sustainability Accounting Standards Board, and they now have some pretty specific standards for 11 sectors and I believe 77 industries. But they are not the only ones. In the U.S., we have more acronyms than we know what to do with. Just to give you a sense, I looked them all up. There’s GRI (Global Reporting Initiative), TCFD (Task Force on Climate-related Financial Disclosures), CDSB (Climate Disclosure Standards Board), IIRC (International Integrated Reporting Council). You can hardly keep all these acronyms in your head, and each of them have somewhat different standards.”


He noted that he is a member of the advisory board of S&P, which has a new business doing ESG ratings. Its rival, Morningstar, also does ESG ratings. “Of course, each of these groups has their own standards,” Pozen added. “So the question is what is the appropriate role of FASB and IASB in this area? And I think it’s a very difficult question.”


He pointed out, however, that a new group, the Corporate Reporting Dialogue, has brought together a number of the other groups, and they now are working on coming up with a unified set of disclosure principles and recommended disclosures in climate-related issues. However, he added that he would like the Financial Accounting Standards Board and the IASB to act as the conveners to try to put together a coalition of the various groups and companies to try to come up with some standardized disclosures in some of the areas, or at least best practices, perhaps in the area of human capital.


FASB Chairman Russell Golden agreed with Pozen’s idea of trying to bring together the various standards, but not necessarily having FASB or the IASB be responsible.


“I think Bob is right,” he said. "What I’ve seen with my experience of standard-setters is when you have two groups and you’re trying to encourage them to get similar outcomes, communication is the way to do it. Bob’s point about convening is what I think is the right first step. They can talk about what they’re seeing. They can talk about the degree of identification. If not, why not? That to me is the first step. The first step is to agree they want to come together. Then, once they agree, then Bob will host the meeting.”


Hoogervorst is skeptical about the role of accounting standard-setters in sustainability reporting.

“It is a very difficult issue,” he said. “On the one hand, I think that most of us would agree that sustainability is a huge issue and a real problem. Is financial reporting going to tackle that problem? I don’t think so. It’s too big a problem for reporting to solve, and we should not have exaggerated expectations of it. There’s also a high degree of hype around the issue. There are lots of commercial interests. We have to be very careful, but I do think that what people remember and most like is the part of sustainability accounting reporting that is outward-looking.”


However, he warned of companies using sustainability claims as a cover for harmful practices. “That’s also where I feel that most greenwashing is taking place,” he added. “We don’t need sustainability reporting to know that the aviation industry has an environmental problem. What we need is proper pricing, and ESG reporting by Ryanair or American Airlines is not going to make a huge difference. What I do think is relevant for companies and for financial reporting is what do sustainability issues mean in terms of the future. There are standard-setters that specialize in that area, and I think those kinds of standards can provide useful information for investors.”


Hoogervorst noted that the IASB is working on updating what it calls the management commentary and practice statement, which is basically a guide to how to write an annual report. “It doesn’t say anything about sustainability issues at this moment, and we do need to pay attention to that,” he added. “We need to be able to tell companies, if you have sustainability issues and you think it may affect the future value of the company or even the current value of the company, that’s a big challenge. You should work on that, and there are standards that will provide information which is useful. We should stay within our scope of providing decision-useful information on financial matters to investors. We should not try to branch out into the question of what do companies do to save the earth.”


“Investors never think they have enough information, and issuers think there’s way too much,” said Kurt Schacht, managing director of advocacy at the CFA Institute, in introducing the discussion. “It’s too expensive. Quarterly reporting is too expensive. Nobody is paying attention to it, and is non-GAAP the cat’s meow, or is non-GAAP actually fake accounting?”


Wall Street Journal columnist Jason Zweig, who moderated the discussion between Hoogervorst and Golden, asked Golden whether the pressures faced by FASB are less than what the IASB faces overseas or just as strong.


“I think they are less here than what Hans talked about for a couple of reasons,” said Golden. “One is the scope of authority of FASB is less than what the IASB has. We only write standards for basically the audited financial statements of public companies, whereas you have a broader remit with the management commentary. I agree with what Bob Pozen said that accounting standard-setters should not be trying to drive management behavior. We should be writing standards that reflect management behavior. But I also agree with Bob that there are certain aspects of ESG that are important for investors to consider and understand because it will impact value and it will impact cash flow.”


Goodwill impairment and amortization and more

Kristen Sullivan, a partner at Deloitte who is also Americas region sustainability services leader at the firm and chairs the AICPA’s Sustainability Assurance and Advisory Task Force, recently met with Accounting Today to talk about sustainability issues.


“I think that the role that the accounting profession is increasingly playing, that we’ve seen a dramatic shift in corporate disclosure and how companies are communicating about risk and opportunity, and how ESG has really been defined under this universe,” she said. “No. 1, there’s an expectation for enhanced disclosure and we’ve seen tremendous growth. Eighty-six percent of the S&P 500 provide sustainability disclosure in some form, and investors continue to emphasize that they believe disclosure — ESG disclosure in particular — provides critical insight into how companies are thinking about risk and opportunity through expanding that aperture of risk and opportunity from a business consideration. But there’s still a disconnect in the market in terms of meaningful and decision useful and reliable disclosure.”


Last month, Deloitte issued a paper on sustainability disclosures going mainstream. “From our perspective, we believe that clearly the purpose of disclosure is to help companies communicate and meet the information needs of their stakeholders,” said Sullivan. “And as those expectations continue to change, where users are looking for more insight into when you think about climate risk, how is your business model vulnerable, and what are the dependencies you have in terms of physical as well as economic transition risks? How are you thinking about how management is considering a proxy for the broader universe of opportunities that can have disruptive impacts on the business?”


At the IFRS Foundation and CFA Institute event, Golden and Hoogervorst also discussed a number of other topics, including non-GAAP measures, proposals for changing goodwill impairment and amortization, and the idea of moving from quarterly to semiannual reporting. Neither of them favored semiannual reporting, but FASB is looking closely at changing goodwill impairment and amortization.


“At the FASB we recently put out an invitation to comment, and what that document does it describes the financial reporting problem that the board has observed,” said Golden. “It describes multiple perspectives and really asks our stakeholders to weigh in. We got almost a hundred comment letters. Right now we’re gearing up toward a public discussion of the pros and cons of amortizing goodwill. I would say the majority of the board at the FASB would prefer to reinstitute the amortization of goodwill. If you like amortization of goodwill, that’s the good news. The fact is that we don’t exactly have an agreement on how to do that at this time.”

Different board members favor different approaches, and Golden doesn’t want to have another area where FASB and the IASB fall out of alignment.


“One of the situations we have in the U.S. is we allow private companies to amortize goodwill over 10 years,” he added. “And we have a commitment to keep converged standards. So it’s a very difficult challenge for the board. Do we want to converge the U.S. system and have public and private amortized over 10 years and risk deconverging from the international group, or do we want to work with the international counterparts and see if we can come to a global solution? I think the invitation to comment has helped us to better understand the advantages of amortization. We’ll have international participants at our roundtable. We hope that we can work with the international community to come to a solution that is converged.”




About 2.7M fewer people got tax refunds after law change

By Laura Davison


About 2.7 million fewer people got tax refunds this year under the tax law overhaul that altered rates and paycheck withholding starting in 2018, according to new figures from the Internal Revenue Service.


The IRS estimates it sent about 113.4 million refund checks to taxpayers, down from 116 million sent a year earlier for tax returns for 2017, before the massive overhaul took effect, according to agency data released Thursday.


President Donald Trump signed the $1.5 trillion tax-cut law in December 2017, his first major legislative victory.


The 2.3 percent decline in refund checks illustrates a sore point during last spring’s tax filing season as many taxpayers expected to see benefits from the law, which cut tax rates, boosted the child tax credit and increased the standard deduction.


About 80 percent of filers received a tax cut under the new law, but changes in withholding rates meant that many got the tax cut in small chunks in their paychecks throughout the year, rather than in one large check after filing their tax return.


The Treasury Department twice announced penalty relief for taxpayers this spring who were expecting a refund but instead discovered they owed taxes.


“As individual taxpayers adjust to these tax law changes over time, the projected refund volumes are expected to return to the historically observed trend,” the IRS said in a report released with the data.





IRS projects fewer schedules, more e-filing

By Jeff Stimpson


The post-tax-reform decline in the Schedule A, the redesign of the 1040 and the continuing prevalence of e-filing will reshape the future filing landscape, according to the IRS.


The IRS Statistics of Income Division’s recently released “The 2019 Calendar Year Projections of Individual Returns by Major Processing Categories” (Publication 6187) presents multi-year projections of the number of individual 1040 series returns to be filed with the IRS by such categories as filing medium (paper versus electronic); and other characteristics such as refund returns.


Among the significant trends:

  • Impact of the Tax Cuts and Jobs Act. As a result of the increase in the standard deduction, Schedule A volumes are estimated to decrease in 2019 almost 65 percent from 2018. More balance-due returns may be expected in 2019, with the refund volumes projected to decrease some 2 percent from CY 2018. As taxpayers adjust to tax law changes over time, projected refund volumes are expected to return to normal.


  • 1040-SR. This new form, to be used by individuals who are at least 65 years old by the end of the taxable year, will be available beginning with filing year 2020. The IRS projects that some 1.8 million paper and some 17 million 1040-SRs will be filed in the first year of availability.


AT-101819 - IRS 1040 projections - GRAPH


  • New schedules. Starting with the 2019 filing season, the new 1040 replaced the 1040, 1040-A and 1040-EZ, and could be accompanied by one or more schedules. The IRS projects some 13.9 paper versions and some 152 million electronic versions of these schedules will be filed in calendar year 2019. Starting with the 2020 filing season, Schedules 2 and 4 will be consolidated into one, as will Schedules 3 and 5. Schedule 6 will be eliminated.


  • E-filing growth. Since the IRS Restructuring and Reform Act of 1998, the number of individual returns e-filed increased from 24.6 million in calendar 1998 to 134.7 million in 2018. Individual e-filing is expected to continue to grow at about 1.8 percent in 2019 to some 137.2 million returns, reaching 152.4 million returns by 2026.




Organizations increasingly vulnerable to fraud

By Michael Cohn


Companies lack adequate anti-fraud staff and resources and are seen as more likely to fall prey to fraud than in the past, according to a new report.


The report, released Thursday by the Association of Certified Fraud Examiners at a Fraud Risk Management Summit in New York, polled 886 ACFE members and found that 49 percent of the respondents believe their organizations are more vulnerable to external frauds now than in the past, compared to 38 percent of respondents who note the same about occupational fraud.

Meanwhile, 58 percent of organizations currently have inadequate levels of anti-fraud staffing and resources, according to the respondents.


"Without adequate resources or staff, fraud examiners are limited to how much they are able to sufficiently investigate and stop fraud," said ACFE President and CEO Bruce Dorris in a statement. "Each day that a fraud scheme is able to continue, the victim organization is losing money to a situation that could likely be prevented."


Embezzlement is a common form of fraud, with 72 percent of teams frequently or occasionally investigate employee embezzlement, making it the most common type of fraud investigated.

Fraud investigators in the insurance industry have the largest caseload, with an average of 17 cases at any given time, while those in the mining industry have the smallest average caseload of two cases. Organizations in the government and public administration sectors typically have the longest fraud investigations, with teams taking an average of 94 days to close a case.


Companies are aiming to beef up their efforts to beat back fraud, with 60 percent of the respondents polled saying their organizations expect to increase their investments in anti-fraud programs in the next two years. However, 15 percent of the organizations in the survey typically don’t recover any of their funds lost to fraud, while another 64 percent recover less than half of their losses, according to the report.


“It is important to benchmark current anti-fraud efforts globally, across industries and within organizations of different sizes in order to get a holistic picture of how organizations are tackling fraud,” Dorris stated. "This data allows organizations to evaluate the effectiveness and efficiency of their anti-fraud initiatives, as well as to identify areas for improvement, expansion or investment.”




Could you be a target for cybercrime?



Key takeaways

  • Understanding the many forms of cybercrime may allow you to better defend yourself.
  • Use 2-factor authentication for all online financial accounts.
  • Maintain updated industry-standard operating systems and software.
  • Do not use public Wi-Fi for your finances or other sensitive items.



You've likely spent a good deal of time thinking about investment risk. But have you stopped to think about more personal security issues, such as the safety of your online financial transactions and information stored on your computers? While most people recognize that online fraud or cybercrime is a potential threat, few know how or why they may be at risk. Cybercrime can take many forms, and understanding who the enemies are and how they commit crimes may allow you to better defend yourself.


The "Bad Guy"

Economic cybercriminals pose the greatest online risk to your family's personal financial data and assets. Make no mistake, many of these thieves are highly skilled and sophisticated. They may be individuals or coordinated groups that use technology to steal. For most of us, cybercrime can best be described as an extension of traditional criminal activity focused on personal financial data and monetary theft.


How do cybercriminals operate?


Indiscriminate targeting

In some cases, cybercriminals cast a wide net with "phishing" scams, among others, and hope the sheer quantity of potential victims will yield sufficient economic benefit (see "The making of a cybercrime," below, for more details on how cybercriminals attack).


Specific victim targeting

A growing and more concerning trend is the specific targeting of high-net-worth individuals. In many of these cases, criminals spend a great deal of time and effort identifying a worthwhile target and then developing a victim profile based on public and private information—such as property records, credit information obtained via hacking, and posted details on social networks—with the goal of stealing assets from financial accounts.


Although the actual criminal act can take several forms, the basic steps are often similar. Below is a relatively common scenario:

  • Step 1: The thief sends an email with a link or attachment to the victim that appears to come from a known party. The targeted victim then clicks the link or attachment, which includes malicious software (malware) that infects the victim's computer.
  • Step 2: The thief uses installed malware to steal login credentials to the victim's financial accounts. This will generally allow the thief to log in as the victim.
  • Step 3: With access to accounts, the thief changes the victim's profile at the financial institution and/or impersonates the victim and moves money to criminal accounts at a different institution.



That's the bad news. The good news is that with some simple steps, you can improve your defenses and reduce your vulnerability to this type of crime.


Steps you can take to help keep your online accounts safe


1. Use 2-factor authentication and strong passwords

Treat your computing devices as you would your front door—restrict access and use tough security measures. Passwords are the keys to your online financial information. If cybercriminals find them, they can unlock the doors to your bank accounts, investment accounts, and your personal information. Unfortunately, a significant amount of malicious software trolls the internet looking specifically for account credentials (IDs and passwords). With an inadvertent click on what appears to be a legitimate link or the opening of an attachment designed to look legitimate, this software can be loaded on your machine and be ready to take your "keys."


Go for 2

Adding an additional layer of security when you access your accounts, called 2-factor authentication, is a strong defense against this type of attack. Fidelity and many other financial firms now offer 2-factor authentication. It requires you to enter a unique security code, randomly generated and sent to your phone or other mobile device, in addition to your standard login. While not completely foolproof, 2-factor authentication raises the bar for cyberattackers trying to access your accounts. You might also consider it for nonfinancial sites—Google, Apple, Microsoft, Facebook, Amazon, and Twitter all offer 2-step authentication options.


Go long and stay strong

You've probably heard this before, but it bears repeating: Never use names, birth dates, Social Security numbers, or any personally identifiable letters or numbers as your password. Use a different password for every application and change them often. Why? The dangers of password reuse. Every year there are data breaches and more sets of credentials (user IDs and passwords) leaked onto the internet. It is common practice these days for criminals to collect these credential dumps and try these user IDs and passwords at financial sites, email providers, mobile phone providers, social media sites, and others. If a Fidelity customer were to use the same password here that they used on another account, and that other account was breached, their Fidelity account could be at risk.


What constitutes a good password? The most important factor is length (at least 12 to 14 characters is best), but complexity also makes passwords more unique. Use a combination of letters, numbers, and special characters and stay away from dictionary words or common combinations of words. It's also best to avoid common substitutions within words, like replacing the letter "o" with a zero. It's just too obvious. A string of uncorrelated words with numbers and special characters is best. Importantly, when selecting a password, don't rely on free password strength checkers—they often miss the mark.


Install a password manager

These days, most of us have dozens of passwords covering multiple devices and everything from social media to subscription services, e-commerce, banking, and Wi-Fi. Remembering all these passwords, and changing them frequently, just isn't sustainable. Fortunately, there's an app for that. Password manager apps generate and store all your passwords in a secure environment. They'll even auto-fill login information for stored sites. Many now sync your passwords across all your devices and automatically generate new ones on a regular schedule. The cost of state-of-the-art password managers is negligible—especially when compared with the convenience and security they provide.


2. Install industry-standard systems and software, keep them up to date, and perform regular backups


One of the smartest things you can do to keep your financial information safe is to use modern, industry-standard operating systems and keep them up to date. Credible vendors have teams of cybersecurity specialists dedicated to fixing vulnerabilities in their current systems, and they are always on the lookout for new ways cybercriminals can hack into their products to access users' computer files or install malicious software.


Updating your systems is easier than it used to be

Today, most operating systems let you set your update preferences to automatically install patches as soon as they are available. That goes for software too, including antivirus protection. Don't forget to update your mobile phones and tablets, and the apps installed on them. You can set update preferences to do this automatically, but many devices need to be plugged into your computer for a complete upgrade. It's a good idea to connect your mobile devices to your computer at least once a week so these updates can be downloaded and installed properly.


You can never have too much backup

Backing up your data is good system hygiene. It prevents your information from being lost forever and immunizes you from ransomware attacks. In this increasingly common scheme, criminals lure you into clicking an email link that downloads malware and blocks your access to the computer. The perpetrators can hold your hard drive hostage, demanding a hefty ransom to unblock it. If your system data is backed up elsewhere, it eliminates any leverage the scammers have, neutralizing their threats.


Backups are most effective when done in a continuous, real-time environment. Savvy users employ redundant methods—typically a USB-connected external storage device in tandem with an encrypted cloud-based service. External storage offers more immediate data retrieval, while cloud-based services can store much more data. Also, in the event of a flood or fire, both the computer and external storage device may be lost, but offsite backups to a cloud-based service would be safe.


Don't forget to include mobile devices in regular backups. This can be done via a cloud-based service, but a full backup may require connecting to a computer. By syncing up your photos and home movies to your computer, they will then be included in regularly scheduled backups, keeping them secure.


3. Use caution when linking to financial accounts or e-commerce sites through email

Cybercriminals are getting smarter about making their phishy emails look legitimate. These emails mimic those of financial institutions, complete with logos and convincing signature lines. Searching Google and social media sites makes it easy to personalize these emails with your name and subject lines like "Your recent transaction with us." All of this is designed to lower your guard so you'll be more apt to click a link to a fraudulent version of your provider's website. This allows the scammers to download malicious software onto your computer or gain access to your passwords and usernames.


The best offense is a good defense

Use caution when linking to your financial institution via email. Instead, go directly to your provider's website by using a link you've saved in your "Favorites" menu. That way, you'll be sure you arrive at a legitimate website. Always look for the "https" prefix in the site's address. This indicates that the connection to the site is encrypted to protect your sensitive data from prying eyes.


4. Always access your accounts from a secure Wi-Fi location

Your home Wi-Fi network comes with built-in security, but it's not foolproof. Your network provider supplies you with a router ID and password, but these are default settings. Cybercriminals know the defaults for major network providers. If you're using these settings, your "secure" home Wi-Fi network may not be as secure as you think.


Home networks now connect computers and smartphones to thermostats, TVs, refrigerators, and residential security systems. Each device is a potential weak spot in your Wi-Fi network. As your home becomes more dependent on the internet, so does your exposure to a network breach.

When setting up your home network, consider changing the default network ID and passwords. Consider installing an Intrusion Detection or Intrusion Prevention system, as well as an applications-based firewall, to further secure your network.


Beware of public Wi-Fi

Everyone loves free Wi-Fi, but unsecured public wireless access points are easy to intercept, providing an opportunity for attackers to snoop on your online activity. A safer alternative is to use only secure Wi-Fi networks. If you use your laptop or mobile devices while traveling, purchase a subscription to a paid hotspot provider in which the networks are password protected and have additional levels of security.


5. Consider using a dedicated device for online banking


One of the best ways to secure your online financial information is to dedicate one device exclusively for banking and financial use. Many cyberattacks come from malware installed while you're web surfing and reading emails. Eliminating those activities from a dedicated banking computer goes a long way toward keeping your financial information out of harm's way.


Help us help you

A dedicated banking device also helps financial institutions keep your accounts secure. Most, including Fidelity, monitor client accounts for fraudulent logins from unauthorized computers and will alert you if there is suspicious activity in your account. When Fidelity surveyed client login patterns, we found many users logging in from multiple devices. One or two were common, but some clients routinely logged in from a seemingly random assortment of systems, making it difficult for an institution to distinguish a legitimate login from a fraudulent one. By using one device for all transactions, an illegitimate login stands out, and the institution will be able to move quickly to alert you and secure your account.


6. Understand your computing environment and consider whether you need help


If you have a complex computing environment, a comprehensive cyber-risk assessment may be an appropriate step in protecting your personal information. Individuals with complicated online footprints may want to consider implementing additional systems (e.g., intrusion prevention and detection, firewalls).


Because cyber threats evolve almost as fast as technology itself, consider retaining a firm to provide ongoing system surveillance, support, and maintenance. These services include everything from monitoring your home internet traffic and blocking outside threats, to educating family members about smart social media practices, safe web surfing and e-commerce protocols.


A good risk assessment will be specific to each person and should consider questions like:

  • How many computers, mobile devices, tablets, TVs, home security systems, and appliances are connected to your home Wi-Fi network?
  • Are they shared across personal and home office use?
  • Do non-family members regularly in your home have access to your Wi-Fi network or computing devices?
  • What backup procedures are in place for each device?
  • Are you or other household members active on social media like Facebook, Twitter, or Pinterest?




No one wants to spend time thinking about all the bad things that can happen, but it's important to understand potential threats to your assets and take measures to eliminate them. When it comes to protecting your financial accounts from cyberthreats, practicing good system hygiene and making a few changes in your user habits will significantly improve your online security. Clients can play a key role in helping Fidelity detect fraud. They can help us help them by maintaining a general awareness of their accounts, including staying alert to emails regarding password resets and account changes, and periodically logging in and checking for unusual transactions and activity.


Fidelity uses sophisticated security measures to protect our customers. We also make many additional security tools available for customers to utilize, including 2-factor authentication and transaction alerts. Of course, we also provide a Customer Protection Guarantee for fraudulent activity. Make sure to visit Fidelity's online customer security site to explore some of these features, and learn more about what Fidelity is doing to help keep your assets safe.



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

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