Data Security in the Mobile Era
By Johannes Hertz
Enterprise data is increasingly becoming a primary asset for many companies, so it is not surprising that data security continues to top the C-suite’s priority list — particularly for CIOs. The reasons that data security is of higher importance are some of the same reasons that it is more difficult to protect than ever before. The growing adoption of mobile and edge devices is one of the primary contributors to data growth, but also results in data being spread across more devices and further outside of enterprise walls — and sometimes outside of the security of the organization’s network.
As a CPA, your duty of client confidentiality is deeply ingrained — and not something that is taken lightly. For many major enterprises, data security can be such a daunting task that it becomes quite easy for things to fall through the cracks. Employees are busier than ever; and while ideally every enterprise employee should also be an IT data security expert, this is just not realistic. With consideration of increasing workloads, it is not that shocking that security protocols and or complex technical processes intended to protect sensitive data are often disregarded.
The problem that your clients face is that competitive pressure demands the most efficient and effective way of working, and typically the fastest way is usually the preferred way. This clearly explains the proliferation of smartphones, tablets, and free file-sharing and collaboration solutions. The problem with all these new efficiency-focused solutions is that they create many more points where data can be leaked or breached. These innovative technologies focused on anytime-and-anywhere access may also undermine an enterprise’s dominion over its sensitive data.
So what happens? Let’s take a classic example of the results for a publicly traded company. You are the CPA providing reporting on the quarterly results. A client’s CFO sends you several spreadsheets and documents asking an opinion on how he or she could express the less-than-stellar results in an appealing manner. Naturally, you are really careful with the information; concerned that you adhere to professional standards and ethical protocols. Even so, the information is leaked. Now there’s not only reputational damage but possible fines for your client. Unfortunately, the first finger is often pointed at someone outside the company, and then the witch hunt begins.
So what actually happened? At the same time, your CFO sent you the information, the marketing director was given copies. These were sent to the design agency that prepares the official results for shareholders and the SEC. One of their designers was at a conference and left his tablet at a competitor’s booth. The information was not properly secured and the poor results were leaked by the competitor before the designer could even catch his flight home.
For many years, companies solved this kind of threat with a classic secure data room. This restricted access to sensitive documents to only a small group of people. This works up to a point; the point being where high levels of real-time collaboration are essential, companies have an increasing need to operate at higher speeds. In order to address these new data security challenges, companies need a new paradigm, and yes, some new technology.
About the Author
Johannes Hertz is CFO of Brainloop located in Cambridge, MA. He oversees all financial operations across Brainloop’s various European and U.S. subsidies. Johannes can be reached email@example.com.
Seven Ways to Win Someone's Trust Without Using Words
By Marvin Brown
Trust is at the core of every type of human transaction, whether it's in business, family matters, or with personal relationships. If you want to get hired, you need to inspire trust. If you want to make a sale, the prospect has to trust you. To get someone to listen to your message, he or she has to trust you completely.
The best way to get someone to like you is to win his or her trust. Like and trust are first cousins. We generally don't like people we don't trust. And we tend to trust people we do like.
You can't get someone to trust you by saying: "Trust me." In fact, if you say that, the person will immediately become suspicious of you. The best way to get others to trust you is by using body language.
Experts say it takes anywhere from five seconds to five minutes to make a first impression. Either way, the process begins immediately — even before you speak. That's because you're already communicating by using body language.
Seven Ways to Win Trust
Here are a few simple tips and hints for using body language to instill trust right away. Once you have someone’s trust, you'll have an ally who will be open to hearing your ideas.
1. Give a heartfelt, teeth-showing smile. This says to the other person, "You can relax and feel safe with me." Women are generally better at this than men. To practice, pretend you've just bumped into a great friend you haven't seen in years, or pretend you've been introduced to a famous celebrity you've long admired. Reproduce that smile, and for a few days practice using it when you greet people. Pay attention to its effect on them.
2. Add a smile when delivering encouragement. When telling someone you're glad to meet them, or when praising, complimenting or congratulating them, always accompany that positive message with a smile that externalizes your inner feelings of joy or genuine warmth and affection for the person. It magnifies your message and makes it more memorable.
3. Use a handshake to intensify the moment. A strong handshake is absolutely essential, no matter what your gender. But this under-used gesture is for more than meeting someone the first time. A handshake when ending a conversation delivers a physical punctuation mark that makes your encounter more memorable. Also, shake hands when thanking or giving congratulations and completing an agreement. Incidentally, adding your name to your handshake when meeting someone new makes that person 75 percent more likely to remember your name.
4. Add an extra second of eye contact when shaking hands.Always look the other person in the eyes for a full second—while smiling—before letting go of your hand. This extra moment has a tremendous impact; it makes you seem charismatic.
5. When listening, complete the "communication circuit" with your eyes. Give face-to-face attention and make eye contact with the person who is speaking. This simple gesture completes the invisible connection between speaker and listener.
6. Maintain eye contact longer than you're used to. Normally, we maintain eye contact between 30 and 60 percent of the time. When you look at the other person more than 60 percent of the time, it signals that you're interested and that person matters. If you're having difficulty doing this, lean forward slightly. This posture helps you maintain eye contact. And to give your eyes a break, it's okay to let your gaze migrate slightly to the eyebrows or the nose area just between the eyes.
7. Mirror the speaker's sentiments. It's incredibly affirming for a speaker when the listener shows that he or she is closely following the conversation, and that the speaker's words are having an impact. You show this by nodding, which in effect says: "Go on, I'm engaged," or by making expressions that are aligned with the speaker's emotions: squinting when the speaker is conveying irritation; frowning when the message is sad; smiling when the message is upbeat; and tilting your head to the left to express empathy.
When you practice and become natural at using all of these body language cues, you will give people reassurance and win their trust. They will view you as a genuine person who is sincerely interested in them. By mastering these simple gestures, you will possess the ability to make allies and be more influential among them.
About the Author
Marvin Brown is an expert in business communication strategies, a sought-after speaker, and the author of How to Meet and Talk to Anyone, Anywhere, Anytime: Simple Strategies for Great Conversations. Marvin can be reached firstname.lastname@example.org. Interested readers can learn more atwww.howtomeetandtalktoanyone.com.
Congress Ends Shutdown, but Stage is Set for Next Round
By Terry Atlas, Roxana Tiron and Kathleen Hunter
(Bloomberg) After the partisan passions and heated rhetoric, the disruptions of a government shutdown and displays of dysfunction, Congress did what it could have done weeks ago: voted to fund the government and lift the debt limit.
The passage last night by wide margins—an 81-18 vote in the Democratic-led Senate, followed by a 285-144 vote in the Republican-controlled House—allows the U.S. to avoid default and ends the shutdown that began Oct. 1 and has taken $24 billion out of the economy.
President Barack Obama signed the bill just after midnight, according to a White House statement. The measure puts government workers back on the job as soon as today and permits the U.S. to continue paying its debts, benefits and salaries.
“We’ll begin reopening our government immediately and we can begin to lift this cloud of uncertainty and unease from our businesses and from the American people,” Obama said last night at the White House after the Senate voted.
Lawmakers didn’t show they’re any closer to resolving the underlying issues of spending priorities and deficit-reduction measures, particularly in the House where a shrinking political middle makes compromise elusive as the latest events show.
The focus now shifts to a new series of deadlines—the first for budget negotiations with a Dec. 13 target—that set up more rounds of political combat over taxes and spending on programs including Social Security and Medicare. The deal funds the government at Republican-backed spending levels through Jan. 15, 2014, and suspends the debt limit through Feb. 7.
Tea Party-allied Republicans, such as Texas Senator Ted Cruz, said they would find ways to keep up the fight against Obama’s health care law.
The votes conclude a four-week fiscal standoff that began with Republicans demanding defunding the Patient Protection and Affordable Care Act, and objecting to raising the debt limit and funding the government without policy conditions.
They achieved almost none of those goals. Obama and the uncharacteristically unified congressional Democrats stared down Republicans, particularly those allied with the Tea Party movement, who had sought to use the shutdown and debt ceiling as leverage even as more experienced lawmakers realized they didn’t have the votes.
Judd Gregg, a former New Hampshire Republican senator and veteran of Obama’s first-term fiscal commission, said members of his party took on the wrong fight when they made it about Obama’s health care law. Gregg is now chief executive officer of the Securities Industry and Financial Markets Association.
“It was an exercise in dysfunctional government,” Gregg said in an interview. “It was a loser position from the beginning because there was no way in divided government you’re ever going to repeal Obamacare. We should have been debating as Republicans how we fix our fiscal house.”
The practice of governing by crisis has become so established in Washington that financial markets weren’t disturbed by the impasse, correctly anticipating a deal would come at the last moment as happened in a similar standoff two years ago.
U.S. stocks rallied yesterday on news of the agreement, sending the Standard & Poor’s 500 Index toward a record. The benchmark index rose 1.4 percent to 1,721.54 yesterday in New York after sliding 0.7 percent when the deal looked uncertain the previous day. The Dow Jones Industrial Average rose 205.82 points, or 1.4 percent, to 15,373.83.
The Stoxx Europe 600 Index fell 0.4 percent to 314.42 at 8:44 a.m. in London. Standard & Poor’s 500 Index futures slipped 0.2 percent, while the MSCI Asia Pacific Index added 0.9 percent.
In China, Dagong Global Credit Rating Co. downgraded its local and foreign-currency assessments of the U.S. to A- from A. Dagong is based in Beijing and one of the nation’s four biggest credit-rating companies. China has the largest foreign holdings of U.S. Treasuries, and the latest monthly U.S. government figures showed it increased its total in July.
Federal agencies were instructed to begin opening offices today in a “prompt and orderly manner” and furloughed employees were allowed to return to work, according to a memo from White House budget office Director Sylvia Burwell.
“We will work closely with departments and agencies to make the transition back to full operating status as smooth as possible,” Burwell said in the memo released early today.
Still, the 16-day shutdown hasn’t been cost-free. It has taken a toll on workers who lost paychecks—furloughed employees will receive back pay—and on the U.S. economy. Standard & Poor’s said yesterday the shutdown has shaved at least 0.6 percent from fourth-quarter 2013 gross domestic product growth, or taken $24 billion out of the economy.
“Millions suffered,” said Senator Charles Schumer, a New York Democrat. “Millions didn’t get paychecks. The economy was dragged down and confidence and faith in United States credit and in the United States around the world was shaken.”
Macroeconomic Advisers LLC said in a report prepared this week for the Peter G. Peterson Foundation that the budget fights in Washington have lowered U.S. economic growth by about 0.3 percentage points a year since 2009. The fiscal standoff added more than a half-point to this year’s unemployment rate, or the equivalent of about 900,000 jobs, the report said.
It may be weeks or even months before the government resumes issuing loans, payments and contracts at a normal pace. The budget impasse also raised doubts that will linger about U.S. reliability among major creditor nations such as China and frustrated many Americans.
“The compromise we reached will provide our economy with the stability it desperately needs,” said Senate Majority Leader Harry Reid. The Nevada Democrat negotiated the agreement with his Republican counterpart, Mitch McConnell of Kentucky, after House Speaker John Boehner, an Ohio Republican, was unable to come to terms within his caucus.
“It would appear as though we’re kicking the can down the road one more time,” Representative Jim Bridenstine, an Oklahoma Republican, said in an interview.
The U.S. Chamber of Commerce, the country’s largest business group, supported the agreement, as did the Business Roundtable, an association of large-company chief executives. Several small-government groups, including the Club for Growth and Heritage Action for America, urged lawmakers to vote against the accord.
The votes were held just hours before the nation was set to exhaust its borrowing authority, which the Obama administration had warned would have dire consequences within days given global reliance on U.S. Treasuries.
The Senate accord was unveiled a day after Fitch Ratings put the U.S. AAA credit grade on ratings watch negative, citing the government’s inability to raise the debt ceiling in a timely manner. After a 2011 debt-ceiling fight, Standard & Poor’s downgraded the United States’ credit rating to AA+ from AAA, criticizing the nation’s political process and lawmakers for failing to cut spending or raise revenue enough to reduce the budget deficit.
Boehner, acceding to the demands of the White House and Democratic-led Senate, said in a statement that blocking the bipartisan deal would only create a “risk of default” on U.S. debt, which he previously said would not happen.
Republicans say Boehner’s willingness to heed their concerns will leave his position as speaker unchallenged in the year ahead.
“We fought the good fight,” Boehner said yesterday on WLW, a radio station in his home state of Ohio. “We just didn’t win.”
At the end of a weeks-long stalemate, Obama managed to stave off a frontal assault on his health care law by House Republicans and forced them to surrender on raising the U.S. debt ceiling without conditions.
“It’s clearly a win for the president,” said Patrick Griffin, a congressional lobbyist in the administration of President Bill Clinton, who faced two government shutdowns and a combative Republican Congress. “Whether it’s a battle win or a war win for the president we don’t know. The next battle will come soon.”
Washington, D.C. (October 1, 2013)
By Danielle Lee
The Securities and Exchange Commission announced charges against three auditors Tuesday for violating federal securities laws or failing to comply with U.S. auditing standards during audits and reviews of financial statements for publicly traded companies.
As part of the internally designated “Operation Broken Gate” effort to hold gatekeepers accountable for their roles in the securities industry, the Enforcement Division seeks out and identifies auditors who fail to operate within profession standards.
The auditors charged are CPAs Malcolm L. Pollard, who practices in Erie, Penn., and Wilfred W. Hanson and John Kinross-Kennedy, who live in the Irvine, Calif., area. Pollard and Hanson agreed to settle the individual actions against them and will be prohibited from practicing as an accountant on behalf of any publicly traded company or other SEC-regulated entity. Kinross-Kennedy is litigating his action in a proceeding before an agency administrative law judge.
Pollard and his Erie-located firm engaged in improper professional conduct while auditing three companies that are empty shells or in developmental stages, according to the SEC’s order instituting a settled administrative proceeding, which found these audits seriously deficient. The audits failed to: include evidence of procedures performed or conclusions reached, retain required documentation, perform the required engagement quality reviews, and consider fraud risks and obtain written management representations. Pollard and his firm nonetheless represented in each report that they conducted the audits in accordance with the standards of the Public Company Accounting Oversight Board.
“These orders reinforce the importance of the audit process and the critical function the auditor plays,” said Antonia Chion, an associate director in the SEC’s Division of Enforcement, in his statement. “Pollard and his firm repeatedly engaged in unreasonable conduct that resulted in violations of applicable professional standards. Their misconduct demonstrates a lack of competence to audit the financial statements of companies registered with the Commission.”
According to the SEC’s order instituting a litigated administrative proceeding against Kinross-Kennedy, of the 23 public companies for which he has been an independent accountant since 2009, there were significant deficiencies in six of his audit engagements, and he failed to obtain engagement quality reviews for more than 30 others. Kinross-Kennedy falsely represented that he conducted his audits in accordance with PCAOB standards.
Hanson, according to the SEC’s order, conducted engagement quality reviews for five of Kinross-Kennedy’s audits, but was not competent to serve as the engagement quality reviewer and failed to exercise due professional care, in addition to failing to conduct multiple EQRs in accordance with PCAOB standards.
“Engagement quality reviews are intended to be a meaningful check on the audit engagement team’s work, and when conducted properly they improve the reliability of a public company’s financial statements,” stated David Peavler, associate regional director for enforcement in the SEC’s Fort Worth Regional Office. “Kinross-Kennedy failed to exercise due professional care on fundamental aspects of the audits by, for example, using outdated audit templates and failing to adapt to changes in auditing standards. He also retained Hanson to conduct engagement quality reviews when Hanson did not have the recent experience necessary to serve as a competent engagement partner.”
In agreeing to settle the SEC’s charges without admitting or denying the findings, which were that Pollard and his firm violated Securities Exchange Act of 1934 Rule 2-02 of Regulation S-X and Exchange Act Section 10A(a)(1) and (b)(1) by failing to have procedures in place to detect, investigate, and report illegal acts, Pollard and his firm consent to the entry of an order to cease and desist from committing or causing any violations of Exchange Act Section 10A(a)(1) and (b)(1) and Rule 2-02 of Regulation S-X.
The SEC’s order against Kinross-Kennedy alleges violations of Sections 10A(j) and 10A(k) of the Exchange Act and Rules 2-02and 2-07 of Regulation S-X, and improper professional conduct under Rule 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice and Section 4(C) of the Exchange Act.
The SEC order finds that Hanson engaged in improper professional conduct under Rule 102(e)(1)(ii) and Rule 102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice and Section 4(C) of the Exchange Act. Without admitting or denying the SEC’s findings, Hanson consents to an order suspending him from practicing before the Commission as an accountant.
Los Angeles (October 1, 2013)
By Roger Russell
The final two defendants charged in relation to an identity theft scam that used identities stolen from the Los Angeles County Department of Public Social Services to file fraudulent tax returns were sentenced to federal prison Monday.
Michael Williams, of Palmdale, was sentenced to 33 months imprisonment, and Mike Nido, of Los Angeles, was sentenced to 15 months imprisonment. The defendants were ordered to pay restitution to the government of $787,086 and $104,662, respectively.
According to court documents, from May 2008 through July 2010, co-defendant Thomas Marshall, along with co-conspirators Michael Williams, Veronica Niko, Mao Niko, and Mike Niko conspired to defraud the U.S. by using the personal identifying information of various individuals to file false tax returns claiming fraudulent tax refunds.
Veronica Niko stole names and social security numbers from the California Department of Public Social Services (DPSS) computer system. Marshall then gave the personal identifying information obtained from Veronica and others to co-conspirators to file fraudulent tax returns with the IRS. The fraudulent returns claimed the First Time Homebuyer Credit and/or Earned Income Credit, earning defendants as much as $8,000 per return, even though the individuals whose identities were used did not authorize or know about the filings.
Purporting to be tax preparers, Williams, Mao Niko and Mike Niko established bank accounts for the purpose of receiving the refunds claimed on the false tax returns. The refunds received were used for their own personal benefit and as compensation for Marshall and other co-conspirators.
All five defendants pleaded guilty to their various roles in the scheme. Defendants Marshall, Williams, Mao Niko, and Mike Niko pleaded guilty to conspiracy to submit false claims to the IRS. Defendant Veronica Niko pleaded guilty to one count of transfer/use of means of identification to commit an unlawful activity. In total, the United States Treasury paid more than $1.245 million in refunds to the defendants in response to fraudulent returns filed as part of the scheme.
This investigation was conducted by IRS Criminal Investigation special agents.
I have a crazy idea: success isn’t just about hard work.
We hear about hard work all the time—it’s what Olympic champions talk about when they get to the top of the podium and it’s what the media credits as the sole force behind billionaire entrepreneurs. But there has to be something else in the equation of obtaining unimaginable success. What other traits tipped the odds in favor of the world’s most successful people?
What helped propel their careers before they had track records?
For the past three years I’ve been fortunate enough to research and interview some of the world’s most successful people to find the answers to these very questions. Below are just a few of the traits I’ve noticed that have stood out in the personalities of people who have truly made it big:
Growing up, Sugar Ray Leonard would wake up, get dressed for school, and walk with his siblings to the bus stop. As the yellow bus would pull to the curb, his friends and siblings would step up into the school bus, but young Sugar Ray Leonard, who is now a six-time world champion boxer, would refuse to get on. As the bus drove away, Leonard tightened up his sneakers and ran behind the bus all the way to school.
“The other kids thought I was crazy,” Leonard said, “because I would run in the rain, snow—it didn’t matter. I did it because I didn’t just want to be better than the next guy, I wanted to be better than all the guys.”
My generation is used to instant gratification. But Sugar Ray Leonard demonstrated the necessity to be able to buckle down for the long haul and accept that you won’t see any return on investment for years. You have to be able to stay passionately committed even when you can’t see the light at the end of the tunnel. And remember, Sugar Ray Leonard, now one of the greatest boxers in history, was running behind that yellow school bus at a time when others thought he wasn’t “boxing material.”
Sugar Ray Leonard kept at it, to the point that others thought was irrational. Turns out irrational commitment leads to irrational success.
Does what you’re working on excite you so much that it inspires an irrational sense of commitment? Are you willing to chase the school bus for years—before seeing any return? If so, keep running. If not, maybe it’s time to think bigger.
In his early twenties, Tim Ferriss, bestselling author of The 4-Hour Workweek, was running an online sports nutrition company and realized that he would be risking his businesses’ survival if he followed the industry standard of accepting payment up to twelve months after the product was shipped.
“Everyone followed those rules,” Ferriss revealed to me. “I realized I was inviting disaster and financial ruins if I risked my cash flow that way by following the standard protocol, so I insisted on prepayment. Nobody had ever done prepayment. I think that is one of the reasons why my sports nutrition company succeeded where a lot of other startups of that type failed.”
Straying from the norm isn’t easy when you’ve spent your whole life following rules laid out for you at school and at home. It takes a major cognitive shift to understand that the way things are, and have been, can be challenged.
Ask yourself what rules in your industry you accept as fact. Why do you follow them? If the excuse is “that’s the way it’s always been,” it’s time to consider pulling a Tim Ferriss.
Peter Guber, former CEO of Sony Pictures Entertainment, was in his mid-twenties as a new hire at Columbia Pictures when he realized that the way the studio heads were selecting directors was archaic—based on esoteric chatter instead of real data. Guber personally took on the task of solving this industry-old problem.
He went out and got a corkboard the size of his office wall and created a matrix: all the directors in Hollywood listed down the side and all the relevant information sprawled across the top—think of it as a primitive Wikipedia for the entertainment industry.
Word spread around town about the young guy who had this crowd-sourced wealth of data on every director in Hollywood mounted on his wall. In addition to adding value and helping others do their jobs more effectively, the corkboard allowed people to take notice of Guber’s ingenuity.
“It became a tool that allowed people to recognize that I was willing to do things differently. It shined the light on me and it and gave me more currency to make more daring choices,” Guber said. He explained that, “You are in the ‘problem solving’ business—always. That’s the way it works.” This was a key trait that allowed Guber to go from being a new hire at Columbia pictures to the studio chief—in just three years.
Although HR reps fail to mention it on the first day on the job, it seems that taking risks, solving other people’s problems, and creating value—even in a formal corporate environment—could have huge payoffs for your career.
Are there any problems, even outside your job description, that you could solve? What opportunities can you create to add value to both help people as well as supercharge your career?
Growing up in a village outside of Shanghai with no running water or electricity, Qi Lu (pronounced: chee loo) had no idea that one day he would have a corner office at one of the world’s biggest technology companies. As the President of Online Services at Microsoft, Lu has made a drastic journey to the top thanks to what his colleagues call “Qi Time.”
“During college, the amount of time I spent sleeping really started to bother me,” Lu explained to me. “There are so many books I can read and so many things to learn. It feels like, for humans, 20% of our time is wasted [during sleep] in the sense that you’re not putting that time towards a purpose that you care about.”
Although he admits it wasn’t easy, Lu has engineered his body to function on four hours of sleep a night thanks to an unusual regimen that ranges from timed cold showers to daily three-mile runs.
Driven by an unusual hunger to do more, Lu’s sleeping schedule has added an extra day’s worth of work time per week, which aggregates to nearly two months of productivity latched on to every calendar year. And he did it while still in college.
Ask yourself how badly do you want to do more. And what are you willing to give up for it?
Shortly after graduating high school, Steven Spielberg began reducing the time he spent at college and increasing the time he spent hanging within the Hollywood inner circle. “[Spielberg] was going off to Sonny and Cher’s place all the time,” said Don Shull, Spielberg’s childhood friend. In a personal letter to Shull, Spielberg revealed that he would directly approach directors and Hollywood stars on the studio lot and ask them to lunch. And keep in mind—Spielberg was only nineteen years old at the time.
“Spielberg arranged his class schedule so that he could spend three days a week at Universal, watching filmmakers at work and trying to make useful contacts,” writes Joseph McBride in his detailed biography on Spielberg’s career. “He frequently slept overnight in an office at the studio where he kept two suits so he could emerge onto the bustling lot each morning looking as if he hadn’t slept in an office.”
“Steve knew at that early age that filmmaking is not just filming—it’s a people game. And he played it well,” said producer William Link.
While he definitely had talent on his side, so did handfuls of other aspiring directors. What helped Spielberg become the youngest director signed to a long-term studio deal was his focus on building relationships. This has nothing to do with “networking”; this has to do with making friends and focusing on people.
What little changes can you make in your life, starting today, to put a greater focus on people? What investments can you make, in both time and money, to hone the way you play the people game?
Success can come in different fields, but the principles behind it are one. From Sugar Ray Leonard chasing the school bus to Peter Guber’s corkboard, these stories show the unique personality traits that tipped the scales in favor of the world’s most successful people.
Success—while defined by everyone on their own terms—is something that truly manifests itself once you make that mind-set shift and tell yourself it’s go time. Are you ready to make that shift?
Alex Banayan is an associate at San Francisco-based venture capital firm Alsop Louie Partners and the author of a highly anticipated business book being released by Crown Publishers (Random House, Inc.). For more, sign-up for Alex Banayan’s newsletter here.
Boston (October 11, 2013)
By Michael Cohn
The facilitation of tax avoidance strategies could constitute a violation of international human rights law, according to a new report by the International Bar Association.
The report, released Tuesday by the London-based organization of international legal practitioners, bar associations and law societies at the IBA’s annual conference in Boston, argues that some tax strategies cross the line into “tax abuses” that may violate internationally accepted norms of human rights. Prepared by the IBA’s Human Rights Institute Task Force, the report contends that the actions of states that encourage or facilitate tax abuses, or that deliberately frustrate the efforts of other states to counter tax abuses, could constitute a violation of their international human rights obligations, particularly with respect to people’s economic, social and cultural rights.
The report, Tax Abuses, Poverty and Human Rights, asserts that tax practices contrary to the letter or spirit of international and domestic tax laws and policies have a significant negative impact on the realization of human rights in developing countries. Profits flowing out of developing countries can thus deprive governments of the resources that they need to alleviate poverty and uphold international human rights standards.
The IBA report draws on case studies from Brazil, the Isle of Jersey and Southern Africa, examining where to draw the line between legitimate tax avoidance maneuvers and immoral tax practices. The report highlights concerns over the “morality” of sophisticated tax planning strategies, in which corporations and wealthy individuals end up paying little or no money in taxes. Among the types of tax behavior seen as potentially abusive are transfer pricing and other cross-border intra-group transactions, the negotiation of tax holidays and incentives, the taxation of natural resources and the use of offshore accounts.
“The fact that sophisticated tax planning strategies are technically legal is no longer a justification for their use,” said Yale University professor Thomas Pogge, who chairs the IBA Human Rights Institute Task Force. “The impact of tax abuses, facilitated by secrecy jurisdictions, on global poverty is tremendous. The international community has not only a legal obligation but also a moral duty to ensure that states use the maximum resources available to fulfill the civil, political, economic and social rights of citizens.”
The report urges states to implement international standards of transparency and information exchange in tax matters, and businesses to undertake due diligence measures and impact assessment of all operations, including tax planning strategies. Lawyers also need to balance their obligations to defend their clients’ interests with their responsibilities to uphold human rights in their practice, including with respect to tax planning strategies, the report argues.
“The legal profession has an important role to play in confronting the negative effects of tax abuses on human rights,” said Sternford Moyo, who co-chairs the IBA Human Rights Institute and is a member of the task force. “Lawyers have a duty to balance their obligation to their client’s interests with their obligations to uphold human rights and the rule of law.”
The report also takes note of the role of accountants, quoting one unnamed expert interviewed by the task force who observed, “Those who siphon funds out of developing countries can and should know that they are thereby actively diminishing funds that go to efforts to reduce poverty. And those who facilitate tax abuse (e.g., tax havens, secrecy jurisdictions, and certain lawyers and accountants) can and should know that their activities likewise take funds away from efforts to reduce poverty.”
Self-directed IRAs: A tax compliance black hole
Nontraditional investments favored by many self-directed IRAs can lead to unexpected taxation of unaware IRA account holders.
By Warren L. Baker, J.D.
The appeal of investing retirement funds outside of the typical securities market has driven a surge in the use of self-directed IRA (SDIRA) investment structures. These structures come in various forms, but they all start when an IRA account holder forms an SDIRA with a custodian (e.g., a bank or trust company) that is amenable to holding “nontraditional” types of investments. In other words, the feature that makes an IRA “self-directed” is not its general legal framework, but rather the fact that the SDIRA’s custodian permits a wide array of investments and maximum control by the account holder.
Investments within SDIRAs frequently include real estate, closely held business entities, and private loans and can include any other investment that is not specifically prohibited by federal law—anything other than life insurance and collectibles can be held in an SDIRA. The SDIRA itself can be structured as a self-employed plan (SEP), a savings incentive match plan for employees (SIMPLE), or a traditional or Roth IRA, and is normally funded by a transfer from an account holder’s other IRA or a rollover from a qualified retirement account (e.g., a 401(k)). However, one common theme is that the IRA account holder wants to diversify away from 100% stock market-based investments and/or believes that better investment returns exist outside the securities market.
Once the SDIRA is formed and funded, there are two general options for investing the SDIRA’s cash. The account holder can either instruct the custodian to execute an investment directly out of the SDIRA, in which case the SDIRA becomes the legal owner of the asset, or the account holder can invest substantially all of the SDIRA’s assets into a limited liability company (LLC). In the latter case, the SDIRA is usually, but not always, the 100% owner/member of the LLC (SDIRA/LLC). The SDIRA/LLC can then execute investments, generally with the LLC’s manager as the SDIRA account holder, and thus the LLC becomes the legal owner of the asset in question (e.g., real estate). Both investment methods are legally viable, but each leads to legal and tax challenges.
Based on the author’s conversations with thousands of SDIRA and SDIRA/LLC investors (and their advisers) throughout the country, without a doubt there are significant tax compliance problems within this colorful marketplace. In fact, it is likely that less than 50% of SDIRA and SDIRA/LLC investors handle the legal and tax issues correctly, and many of these investors are unaware that these problems even exist. Unfortunately, these pitfalls can result in the complete invalidation of the SDIRA due to a “prohibited transaction” and/or current tax consequences within the SDIRA itself.
The following two examples, which are based on real-life client scenarios (although details have been changed to protect client confidentiality), illustrate issues clients and their tax advisers must be aware of when investing using an SDIRA or SDIRA/LLC. Ideally, these traps are considered before venturing into the world of nontraditional retirement account investing.
Example 1: IRA Invests in Closely Held Business Entity (Toy Company)
Setup. Sarah was a high-net-worth individual and a valued client of a multinational bank’s private trust company. Although the trust company did not routinely facilitate the investment of IRA funds into nontraditional investments, Sarah requested that her IRA invest $500,000 into a new LLC.
The investment gave Sarah’s SDIRA a 25% ownership interest in the LLC, and the trust company held all of the paperwork for the LLC unit purchase on the SDIRA’s behalf. The LLC had three other owners, not related to Sarah, and none of the other investors were co-owners with her in any other business entity. Sarah was not involved in the LLC’s day-to-day operations and did not otherwise personally benefit from the investment.
Investment. The LLC designed, manufactured, and sold children’s toys. The toys quickly became hot sellers, and the LLC recorded a significant profit on its annual Form 1065, U.S. Return of Partnership Income. In turn, each investor, including Sarah’s SDIRA, was issued yearly Schedules K-1, Partner’s Share of Income, Deductions, Credits, etc., which showed ordinary business income. In Sarah’s case, the K-1 forms were mailed directly to the trust company.
Legal and tax problems. Two fundamental legal and tax issues must be considered with any SDIRA investment. First, the SDIRA’s investment could raise a prohibited transaction problem under Sec. 4975. If the investment is not a prohibited transaction, the second consideration is whether the SDIRA’s investment results in current tax to the SDIRA as a result of unrelated business taxable income (UBTI) or unrelated debt-financed income (UDFI).
Sec. 512 imposes a tax on income earned by a tax-exempt organization in a trade or business that is unrelated to the organization’s exempt purpose (UBTI). Unrelated debt-financed income (UDFI) under Sec. 514 is income earned by an exempt organization from property used for a nonexempt purpose that has been acquired by incurring debt. Although the prohibited transaction analysis involves many intricacies and hidden traps, this example assumes, based on the fact that Sarah’s SDIRA investment did not directly involve or benefit a “disqualified person” (Sec. 4975(e)(2)), that the investment did not result in a prohibited transaction. The UBTI and UDFI issues, however, turn out to be much more problematic for Sarah.
Most IRA investments do not trigger current tax consequences, not because all income an IRA earns grows tax free, but because the types of income that an IRA typically earns are exempt from UBTI rules. For example, IRAs that invest in publicly traded securities (e.g., stocks, bonds, and mutual funds) do not owe current tax because gains from the sale of C corporation stock, dividends, and interest income are exempt from UBTI. For this reason, most IRA investors are unaware that an IRA can be required to file a tax return (Form 990-T, Exempt Organization Business Income Tax Return) and pay tax. The two key trigger events for current IRA tax consequences are (1) income from a business that is regularly carried on (whether directly or indirectly) and (2) income from debt-financed property.
Here, Sarah was shocked to discover, five years into the toy company’s operations, that her SDIRA not only owed taxes on the LLC’s yearly profit, but the tax rate on income over $9,750 was 35% (in 2005 when this tax liability was incurred) because IRAs are taxed at trust rates. (In 2013, trust income above $11,950 is taxed at the new, higher 39.6% rate.) Although Sarah’s SDIRA benefited from the profitable investment, the SDIRA owed hundreds of thousands of dollars in income tax, penalties, and interest.
Compliance black hole. Several factors contributed to Sarah’s failure to comply with her tax obligations. First, Sarah was unaware of and uninformed about SDIRA legal and tax issues before her SDIRA invested in the toy company. This normally occurs when an IRA account holder learns that an IRA can invest in almost any type of asset (which is technically true), gets excited about an investment opportunity, and then quickly sets up an SDIRA. Second, as is typically the case, the IRA custodian refuses to take any responsibility and includes language with its IRA custodian agreement stating that all legal and tax consequences of the SDIRA’s investments are the IRA account holder’s sole responsibility.
In fact, it is common for IRA custodians to receive tax documents (e.g., Schedules K-1) and send copies to the SDIRA owner without mentioning the potential UBTI tax consequences. Of course, the SDIRA custodian will claim that it cannot provide this guidance because it could be construed as legal or tax advice, but these same custodians actively promote the idea of nontraditional investing. The result is that SDIRA custodians frequently facilitate IRA investments that will undoubtedly trigger UBTI, but then avoid all responsibility when these tax consequences occur. In addition, because an IRA is not generally required to file a tax return and IRA account holders and their advisers are normally unfamiliar with these issues, no one is likely to realize that a tax has been triggered—including the IRS.
Example 2: IRA-Owned LLC Invests in Real Estate Partnership
Setup. Mark, a retired airline pilot with $1.5 million in his 401(k) account, was afraid of another stock market meltdown and viewed real estate investments as a safer alternative and a diversification technique for his retirement savings. After learning about SDIRAs from a friend, he did some preliminary research online. Mark quickly found numerous IRA custodians and companies that promoted “checkbook control IRAs” (i.e., the SDIRA/LLC concept discussed above) and decided that the lower annual custodian fees and overall control made the SDIRA/LLC the best option for him.
Mark executed a partial rollover of his 401(k) account into his new SDIRA. Subsequently, the SDIRA invested all but $300 into a newly formed LLC, thus creating an SDIRA/LLC structure (it is typical to leave the smallest amount of cash in the IRA as possible). From there, the IRA custodian had very little involvement because all of the investments were made at the LLC level, with Mark facilitating transactions as the LLC’s sole manager.
Investment. Mark’s goal for his SDIRA/LLC was to invest in residential rental real estate, either directly out of the LLC or through a “project LLC” (i.e., a partnership) with other investors. Mark found a real estate investment group that frequently organized partnerships and promised a “passive” investment (i.e., no direct involvement by Mark). The group also told Mark that “our partnerships are perfectly acceptable self-directed IRA investments.” The real estate partnerships collected capital contributions from 20 investors and used the cash plus debt to purchase an apartment building. The apartment building was held as a rental property, with net income distributed to the investors, including Mark’s SDIRA/LLC, quarterly.
Legal and tax problems. As stated above, it is possible for an SDIRA to invest in almost anything, and thus the investment organizer’s statement that real estate partnerships are acceptable SDIRA investments is technically correct. However, this does not answer the question of whether there are more difficult legal or tax issues. For example, “rent from real property” is normally exempt from UBTI, and thus is not currently taxable when earned by an SDIRA or SDIRA/LLC. However, income from debt-financed property (whether held directly or indirectly by the SDIRA or SDIRA/LLC) is partially taxable under the UDFI rules because the income generated from the investment is not earned solely by investment of the SDIRA/LLC’s capital, but rather by bank (or private) financing.
Here, the yearly rental income that is allocated to Mark’s SDIRA/LLC is partially subject to tax under the UDFI rules. Fortunately, the tax consequences will likely be minimal due to the flowthrough of other tax items (e.g., depreciation) from the real estate held by the partnership. However, the SDIRA will likely be required to file a Form 990-T, and, even if no tax is due, it is likely a good idea to file the tax return so that the sale proceeds from the underlying apartment building (which will also be partially taxable due to the debt financing) are offset by the past losses.
Compliance black hole. The SDIRA/LLC structure in and of itself presents legal and tax compliance problems because the actual investments are outside of the IRA custodian’s view (however, as mentioned in Example 1, the custodian’s being directly involved is not a guarantee that legal and tax problems will not occur). This is particularly the case if the SDIRA/LLC is established by a low-cost promoter who cares more about “the sale” than providing the IRA account holder/LLC manager with appropriate advice. Also, because the SDIRA/LLC promoters are normally not law or accounting firms, they arguably should not be providing any advice whatsoever, and, even if they do, that advice cannot be relied upon by the IRA account holder. This has the potential to create a situation where an SDIRA/LLC is established for an IRA account holder who cannot handle the complexity of the structure and who has no way of finding help that he or she can reasonably rely upon.
Here, the LLC owned by Mark’s SDIRA will be considered a “disregarded entity” for federal tax purposes, and thus will not be required to file a tax return. In addition, if Mark is unaware that the debt financing at the real estate partnership level is triggering current tax consequences to his SDIRA, he will not file a Form 990-T either.
HOW TO PROTECT SDIRA INVESTOR CLIENTS
The above examples demonstrate some (but certainly not all) of the potential problems that clients could face if they decide to invest their retirement account in “nontraditional” assets. Protecting clients from the perils of the SDIRA compliance black hole requires several essential steps.
First, before doing anything, the client (and likely his or her CPA and attorney) needs to get up to speed on the unique SDIRA legal and tax complexities. Care should be taken when relying on the statements of custodians and SDIRA/LLC facilitators, as they often are incorrect, incomplete, and/or biased in a way that promotes the particular company’s best interest (e.g., custodians promote the SDIRA because it results in more ongoing fees; facilitation companies promote the SDIRA/LLC because a basic SDIRA alone cuts them out of the equation).
In addition, the basic legal framework can sometimes seem relatively straightforward (e.g., no financial interactions with a disqualified person), but, as is often the case with tax law issues, the more subtle issues are misunderstood by casual observers (e.g., no direct or indirect personal benefits to a disqualified person). For example, see a recent Tax Court case in which two taxpayers personally guaranteed a loan to a company that their SDIRAs owned. The court held that the loan guarantee was a prohibited transaction, which caused the accounts to cease to qualify as IRAs. As a result, the sale of the company stock held in the SDIRAs was directly taxable to the taxpayers (and each taxpayer was liable for an accuracy-related penalty of more than $45,000) (Peek, 140 T.C. No. 12 (2013)).
Tax advisers can also protect clients from the dangers of SDIRA or SDIRA/LLC investing by putting an intensive focus on recordkeeping and, specifically, making sure that “every dollar in and every dollar out” of the SDIRA or SDIRA/LLC is accounted for. This might sound straightforward, but when the client controls numerous entities and/or real estate properties and the SDIRA gets involved in a venture similar to one the client is involved in directly, things can get messy. Commingling of SDIRA and personal assets is almost surely a prohibited transaction, and even what might appear to be a “minor” prohibited transaction can invalidate the client’s entire SDIRA. What makes good recordkeeping even more challenging is the fact that many SDIRA account holders plan to invest using an SDIRA for 20 or more years. In other words, for many clients, getting their retirement funds out of the stock market and into nontraditional assets is not a one-time transaction—it is a fundamental change in their investment plan.
Tax advisers can also protect their clients by asking what their long-term plans are for an SDIRA. Many clients rush into SDIRA or SDIRA/LLC investments without considering any of the following issues:
These issues, along with many others, should be considered and understood before any steps are taken to form and/or invest using an SDIRA or SDIRA/LLC.
In short, the world of SDIRA and SDIRA/LLC investors is growing rapidly, and advisers must understand the potential pitfalls those investment vehicles pose for clients. The tax adviser’s role is particularly critical, given the lack of oversight by SDIRA custodians and SDIRA/LLC promoters and the potential for increased IRS scrutiny.
An amended tax return is a return that changes the filing of your original return. An amended tax return must be filed within three years of the due date of the original return according to the IRS statute of limitations.
When a person files their original return, they are affirming under penalty of perjury that their return is true and accurate to the best of their knowledge. However, many things can arise after the fact that present new information. For instance, a K-1 form that arrives well after April 15th or 1099 forms from brokerage accounts, which have been amended and could change the filing of the original tax return.
A taxpayer who has in good faith filed a true and accurate tax return is under no obligation whatsoever to file an amended return. However, it may be to your benefit to do so.
Filing an amendment to a Federal personal return requires the filing of a 1040X and the applicable state return for whatever state you may be located in.
One of the biggest misconceptions concerning amended returns is that they get audited. In 36 years of preparing tax returns, I have seen no indication whatsoever that amended returns have a higher audit rate.
The IRS has 3 years from the due date of a regular return to audit the return. After 3 years, they can no longer audit that return. When you amend a return, you extend that 3 year statute of limitations. For instance, if you amend a return one day before the original 3-year deadline for auditing returns, you would extend the amount of time the IRS has to audit that return by an additional 3 years. However, as I stated before, there is nothing to make me believe that amended returns are more likely to be audited. The IRS gets hundreds of thousands of amended returns every year for a variety of reasons, so your amended return will not be the only one.
Helpful Hint: I have noted that when changing preparers, it is a good idea to ask the new preparer if he or she will look over a prior year’s return in order to see if there are any mistakes which could/should be changed. I have found that when I get a new client, I am able to find something in about half of the returns I check. Some of the errors are insignificant. However some are very significant, in which case we have filed amended returns and gotten the client extra money back.
Eileen Ambrose, The Baltimore Sun
Consumers weren't able to sign up for insurance under new health care exchanges until last week, but con artists have been scheming for months to steal money or Social Security numbers under the guise of the Affordable Care Act.
And it's bound to get worse, regulators and consumer advocates fear.
Health care exchanges officially opened Oct. 1, allowing consumers to shop on these online marketplaces for insurance from private companies. All the publicity around the rollout is likely to be used by con artists as a peg for new schemes.
"They will use whatever new thing is on the horizon," said Kim Cammarata, director of the health education and advocacy unit of the Maryland attorney general's office.
Regulators and consumer advocates have been working to get ahead of the scammers. The Federal Trade Commission recently held a public meeting on how to protect consumers against fraud with the arrival of health care marketplaces. And the Better Business Bureau, Consumer Federation of America and others have published tips to help consumers recognize fraud.
"We don't want to frighten people off of taking advantage of this new benefit," said Susan Grant, director of consumer protection with the Consumer Federation of America. "But we want them to be careful about it."
Here are things to be on the lookout for as you navigate the new exchanges:
--Help is free: Don't pay for it. Similarly, don't take calls from strangers offering to sell you an Affordable Care Act-compliant policy in exchange for your credit card number, said FTC spokesman Frank Dorman. No one legitimate will call you out of the blue to enroll you in the plan, he said.
--New insurance cards: The Better Business Bureau recently reported that consumers received calls from a scammer claiming to be from the federal government and telling them they were chosen to receive insurance cards through the Affordable Care Act. The caller said the consumers needed to provide bank account and Social Security numbers before the cards could be mailed out.
A similar scheme occurred in Maryland a year earlier. Maryland's attorney general then warned that con artists were calling consumers and telling them they must get a new Medicare card because of the health care law. The scheme seemed to have abated, but lately there's been a resurgence, Cammarata said. There is no need to get a new Medicare card because of the health law.
--Policy pushers: If you're on Medicare, you have already met the government mandate to have insurance next year.
That might not stop someone from trying to sell you a policy anyway. But it's illegal for a person who knows you have Medicare to sell you a policy on the exchange, according to the U.S. Department of Health and Human Services.
--Medical discount cards: Under this scheme, you're sold a card that's supposed to provide discounts at doctors' offices or at drugstores.
"Sometimes they are misleadingly promoted as insurance," said the Consumer Federation's Grant. "And you get this discount card that may or may not be honored by anybody."
Pitches for these cards aren't new.
"This is a good opportunity for that to flare up again," Grant warned.
--That's not Obamacare calling: Don't let your guard down if Caller ID shows that the caller appears to be from the government or other legitimate source, said Jody Thomas, vice president of communications with the Better Business Bureau of Greater Maryland. Con artists have technology that can "spoof" Caller ID, making any number or name they want show up on your screen, she said.
--Uncle Sam prefers snail mail: If the federal government is going to contact you, it's not going to be by email or text message, Thomas said. The government typically contacts consumers via the U.S. Postal Service.
--High-pressure tactics: Beware of ads that try to get you to "act now" or push you to make a decision quickly.
Open enrollment in health exchanges will run through March 31, so you have time to buy. Those who want coverage to start on Jan. 1, though, are advised to purchase coverage by mid-December.
If you suspect fraud, you can report it to the FTC at 877-382-4357.
(c)2013 The Baltimore Sun
Fourth Quarter Tax Planning
For many individuals, the ordinary federal income tax rates for 2013 will be the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%. However, the so-called fiscal cliff legislation passed early this year increased the maximum rate for higher-income individuals to 39.6% (up from 35%). This change only affects taxpayers with taxable income above $400,000 for singles, $450,000 for married joint-filing couples, $425,000 for heads of households, and $225,000 for married individuals who file separate returns. Higher-income individuals can also get hit by the new additional 0.9% Medicare tax and the 3.8% net investment income tax (3.8% NIIT), which can result in a higher-than-advertised federal tax rate for 2013.
Despite these tax increases, the current federal income tax environment remains relatively favorable by historical standards. This article presents some tax planning ideas to consider this fall that may apply to you and/or your family. Note that it is critical to evaluate all tax planning strategies in light of the alternative minimum tax (AMT).
Leverage Standard Deduction by Bunching Deductible Expenditures
If your 2013 itemized deductions are likely to be just under, or just over, the standard deduction amount, consider bunching together expenditures for itemized deduction items every other year, while claiming the standard deduction in the intervening years. The 2013 standard deduction is $12,200 for married joint filers, $6,100 for single filers, and $8,950 for heads of households.
For example, say you’re a joint filer whose only itemized deductions are about $4,000 of annual property taxes and about $8,000 of home mortgage interest. If you prepay your 2014 property taxes by December 31 of this year, you could claim $16,000 of itemized deductions on your 2013 return ($4,000 of 2013 property taxes, plus another $4,000 for the 2014 property tax bill, plus the $8,000 of mortgage interest). Next year, you would only have about $8,000 of mortgage interest, but you could claim the standard deduction (it will probably be around $12,500 for 2014). Following this strategy will cut your taxable income by a meaningful amount over the two-year period (this year and next). You can repeat the drill all over again in future years. Examples of other deductible items that can be bunched together every other year include charitable donations and state income tax payments.
Consider Deferring Income
It may pay to defer some taxable income from this year into next year if you expect to be in the same or lower tax bracket in 2014. For example, if you’re self-employed and a cash-method taxpayer, you can postpone taxable income by waiting until late in the year to send out some client invoices. That way, you won’t receive payment for them until early 2014. You can also postpone taxable income by accelerating some deductible business expenditures into this year.
Both moves will defer taxable income from this year until next year. Deferring income may also be helpful if you are affected by unfavorable phase-out rules that reduce or eliminate various tax breaks (child tax credit, education tax credits, and so on). By deferring income every other year, you may be able to take more advantage of these breaks.
Time Investment Gains and Losses
For many individuals, the 2013 federal tax rates on long-term capital gains are the same as last year: either 0% or 15%. However, the maximum rate for higher-income individuals is now 20% (up from 15% last year). This change only affects taxpayers with taxable income above $400,000 for singles, $450,000 for married joint-filing couples, $425,000 for heads of households, and $225,000 for married individuals filing separately. Higher-income individuals can also get hit by the new 3.8% NIIT on net investment income, which can result in a maximum 23.8% federal income tax rate on 2013 long-term gains.
As you evaluate investments held in your taxable brokerage firm accounts, consider the tax impact of selling appreciated securities (currently worth more than you paid for them). For most taxpayers, the federal tax rate on long-term capital gains is still much lower than the rate on short-term gains. Therefore, it often makes sense to hold appreciated securities for at least a year and a day before selling to qualify for the lower long-term gain tax rate.
Biting the bullet and selling some loser securities (currently worth less than you paid for them) before year-end can also be a tax-smart idea. The resulting capital losses will offset capital gains from other sales this year, including high-taxed short-term gains from securities owned for one year or less. For 2013, the maximum rate on short-term gains is 39.6%, and the 3.8% NIIT may also apply, which can result in an effective rate of up to 43.4%. However, you don’t need to worry about paying a high rate on short-term gains that can be sheltered with capital losses (you will pay 0% on gains that can be sheltered).
If capital losses for this year exceed capital gains, you will have a net capital loss for 2013. You can use that net capital loss to shelter up to $3,000 of this year’s high-taxed ordinary income ($1,500 if you’re married and file separately). Any excess net capital loss is carried forward to next year.
Selling enough loser securities to create a bigger net capital loss that exceeds what you can use this year might also make sense. You can carry forward the excess capital loss to 2014 and beyond and use it to shelter both short-term gains and long-term gains recognized in those years. Note that the wash sale rules can limit the deduction for securities losses.
Make Charitable Donations from Your IRA
IRA owners and beneficiaries who have reached age 70 1/2 are permitted to make cash donations of up to $100,000 to IRS-approved public charities directly out of their IRAs. These so-called qualified charitable distributions (QCDs) are federal-income-tax-free to you, but you get no itemized charitable write-off on your Form 1040. That’s okay, because the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction without having to worry about restrictions that can delay itemized charitable write-offs.
Note: To qualify for this special tax break, the funds must be transferred directly from your IRA to the charity. Also, this favorable provision will expire at the end of this year unless Congress extends it.
At-risk Rules for a Closely Held Corporation
The at-risk rules may limit the amount of loss you can deduct from investment in your closely held corporation. The amount of loss a corporation may recognize from an activity is limited to the amount that is at risk for that activity at the close of the tax year. Any losses limited by the at-risk rules are not forfeited—they are carried forward and may be used in a later year when you obtain a sufficient amount at risk to cover it.
The amount you have at risk in an activity includes the cash and property you contribute to it, amounts borrowed for use in the activity if the corporation is liable for repayment, and amounts borrowed for use in the activity to the extent the corporation has pledged property other than property used in the activity as security for the borrowed amount (to the extent of the net FMV of the corporation’s interest). With respect to the contributed property, however, you count the basis you had in it, not its value. That is, if you contributed land with a basis (cost) of $10,000 and a value of $25,000, your at-risk amount will only be $10,000, not the $25,000 value.
Unfortunately, these rules are not the only ones that may limit your tax benefits from losses in your closely held corporation. You may also be subject to rules limiting losses claimed from passive activities. Additionally, if you hold your interest as a partner or S corporation shareholder, your losses may be limited to your basis in your interest under special rules applicable to partnerships and S corporations.
These loss limitation rules are complex and may be further complicated by how they interrelate. Please contact us if you have questions on how these rules may apply to your specific situation.
Retirement Plan Loans
If you are unable to borrow from a bank or other outside source, your qualified retirement plan may be a good option. IRS guidelines permit a limited amount of borrowing from corporate qualified retirement plans, including 401(k) plans. In general, borrowings are limited to 50% of the participant’s account balance up to a maximum of $50,000 and must be repaid within five years (unless the loan proceeds are used to purchase a principal residence). Hardship withdrawals (different from a loan, which must be repaid to the plan) from 401(k) plans are also permissible in certain circumstances. However, hardship withdrawals are taxable and subject to a 10% penalty if made before age 59 1/2.
Tax law generally prohibits borrowing from IRAs. However, a distribution from an IRA followed by a redeposit of the funds into the same account or another IRA within 60 days of receipt of the funds will qualify as a tax-free rollover transaction. Once you have made such a tax-free rollover, you must wait at least one year from the date of receipt of the amount withdrawn from that particular IRA before becoming eligible to participate in another similar transaction. This once-per-year rule is applied individually to each IRA. Therefore, a person who has more than one IRA may make a rollover once per year on each account. Your use of the funds for the 60-day rollover period is, in effect, a short-term loan. It is recommended that you not implement this strategy without careful planning.
Sticky Question: How Should A Take-And-Bake Pizza Be Taxed?
Cara Griffith, Contributor
Earlier this spring, I wrote about the sales and use taxation of candy. As it turns out, 16 states do not treat candy as a grocery. Groceries are generally exempt from sales tax, so if candy is not considered a grocery, it will generally be subject to tax. Of course, what differentiates candy from groceries is not as intuitive as one might think. For example, a Hershey HSY -0.76%’s chocolate bar is candy, which Hershey’s cookies and cream bars are not.
The reason for this, according to the Streamlined Sales Tax agreement, is that a candy does “not include any preparation containing flour and shall require no refrigeration.” So go for the Twix bar or even a Kit Kat and feel good about it because neither is candy.
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Definitions like this are often the brunt of jokes, but they are an integral part of the complex world of sales and use taxation. Recently, the Streamlined Sales Tax Governing Board Compliance Review and Interpretations Committee (CRIC) received a request for an interpretive opinion determining whether take-and-bake pizzas meet the definition of prepared food. If they are, they would be subject to sales tax in many jurisdictions.
Take-and-bake pizzerias sell uncooked pizzas to customers, who then cook the pizzas at home. Like the candy debate, the question of whether take-and-bake pizzas are prepared food is a matter of interpretation. Currently, states are in disagreement on the issue. For example, take-and-bake pizzas are considered prepared food in Wisconsin, despite the need for additional preparation. By contrast, Minnesota believes that because take-and-bake pizzas are only partially cooked when purchased and need to be fully cooked to be eaten, they are not ready-to-eat products at the time of sale.
But there’s something bigger at stake than just a sales tax exemption: the ability of take-and-bake pizzerias to accept food stamps. In general, electronic benefit transfer (EBT) cards cannot be used for the purchase of prepared food. This means that most restaurants cannot accept EBT cards. But take-and-bake pizza is viewed as a grocery item, not prepared food. As a result, take-and-bake pizzerias qualify under the Food and Nutrition Act of 2008 to accept EBT cards.
So it is for this reason that Papa Murphy’s Take’N’Bake Pizza franchises have undertaken a letter-writing campaign to the CRIC. One letter, written by Todd Suckow, a Papa Murphy’s area supervisor in Minneapolis, sums up Papa Murphy’s plea. He writes: “I realize this decision will not be an easy one for the committee to settle on. With that said, I believe the single and most important reason that this product MUST remain untaxed is that the bulk of our daily, weekly and monthly sales come from single family and low income homes. The decision to tax this raw and unready-to-eat product will appear to those customers as just another tax grab.”
There’s a debate to be had here, but it’s not a tax one. Nonetheless, CRIC is scheduled to take up the request on October 17.
Posted by Jonathan Ciccotelli on Tue, Oct 15, 2013 @ 04:02 PM
The type of business entity you choose directly impacts your Federal tax obligation. Choosing the right entity can reduce your overall tax, when your tax is paid, along with how it is paid.
When structuring your business you will encounter multiple forms for conducting business. Depending on your situation you may choose to be taxed as a C Corporation, Subchapter S Corporation, Limited Liability Company, Partnership, or Sole-Proprietorship. From a “pure” tax perspective a C Corporation is subject to “double taxation.” This double tax occurs as the corporation is responsible for paying its own tax at the Federal level while its owners are forced to pay tax on the salary they receive along with any dividends paid to them. Additionally, upon sale of the company the owners will be taxed twice on the sale, once at the corporate level, and then again as investors. Other pass-through entities, such as, Subchapter S Corporations, Limited Liability Companies, and partnerships are taxed only at the owner level. These entities generally pay no taxes at the Federal level and instead pass their income through to their owners. Sole-Proprietorships have no separate Federal filings and all income is included on the owner’s Federal 1040.
At first glance, pass-through entities might seem like a better choice as they are typically taxed once on their income. However, pass-through entities have two key problems; (1) the income is subject to tax whether or not it is actually paid out to the owner; and (2) in some instances, the profits from pass-through entities may be subject to self-employment taxes depending on the owners level of involvement.
When business owners receive a share of income from a pass-through entity, the income may not only be subject to Federal income taxes, but also self-employment taxes. Self-employment income is subject to a Social Security (OASDI) rate of 12.4% on the first $113,700 of income and a Medicare rate of 2.9% without regards to an income cap. Additionally, beginning with the 2013 tax year these same earnings may be subject to an additional .9% Medicare tax as part of the Patient Protection and Affordable Care Act (PPACA). As a result of the self-employment tax impact one may feel that the cost-benefit analysis is shifted in favor of the C Corporation. This can be true if a C Corporation is subject to a low enough corporate tax rate and its earnings are more favorably balanced with its owners between dividends and salaries.
Another way to further reduce C Corporation taxes is by offering certain benefit plan alternatives to the owners. Benefits offered to owners by a C Corporation are frequently not subject to income or self-employment taxes (OASDI and Medicare), and the savings generated for benefits like 401(k) contributions and health insurance generally outweigh the costs to provide them.
If the cost of self-employment taxes or a C Corporation structure does not sit well with you then the S Corporation might be the “just right” alternative. With an S corporation you are required to pay yourself a reasonable salary based on your position and the level of service that you provide. On that salary, you'll be subject to standard FICA and Medicare withholding taxes. The remaining S Corporation earnings will be taxed at ordinary income tax rates. The balance of your after-tax earnings can then be taken out in the form of distributions which are not subject to self-employment tax. However unlike C Corporations, benefits offered to S corporation officers are frequently subject to FICA and Medicare taxes as well as income tax.
Choosing the form of your business isn't as simple as you might think at first glance. The old rules of thumb don't always apply in a given situation. The best way to figure out which form your entity should take is to sit down with a tax expert to see how you can best minimize your tax liability while also providing you with the flexibility to manage your business. Contact us if you'd like to get started on this process.
New York (October 18, 2013)
By Michael Cohn
Stephen Baldwin, a member of the Baldwin family of actors that also includes his brothers Alec, William and Daniel, appeared Friday in a Rockland County, N.Y., courtroom and paid $100,000 of the $343,068 that he owes New York State in back personal income taxes, penalty and interest.
Baldwin, 47, of Upper Grandview, N.Y., appeared Friday morning before Judge Charles P. Apotheker in Rockland County Court and presented a certified check to the New York State Department of Taxation and Finance. Following an investigation conducted by the Tax Department's Criminal Investigations Division and the Rockland County District Attorney, Thomas P. Zugibe, Baldwin was arrested in December 2012 and arraigned on one count of Repeated Failure to File Personal Income Tax Returns, a class E felony (see Stephen Baldwin Arrested for Failing to Pay State Taxes).
According to the charges, Balwdwin failed to file New York State personal income tax returns for 2008, 2009, and 2010. His total outstanding tax liability due to New York State at that time, including penalties and interest, was more than $300,000.
The 47-year-old actor has appeared in movies such as “The Usual Suspects,” “Threesome,” “Bio-dome” and “The Flintstones in Viva Rock Vegas,” in addition to a stint on reality TV trying to become Donald Trump’s “Celebrity Apprentice.”
In March of this year, Baldwin pleaded guilty to felony tax charges brought against him. At the time, he also agreed to pay an additional $300,000 by the time of his sentencing in March 2014. His next court date is scheduled for January 10 before Judge Apotheker.
"I thank District Attorney Zugibe for his tireless work in prosecuting this case," New York State Commissioner of Taxation and Finance Thomas H. Mattox said in a statement. "It shows that, regardless of a person's occupation or financial situation, all New Yorkers must meet their obligation to pay their fair share of income taxes in a timely manner."
Mattox added that New York State’s Tax Department often arranges installment payment agreements to help taxpayers fulfill their filing requirements voluntarily. "We work diligently with taxpayers to address issues before they escalate,” he said. “If you have a tax debt, don't hesitate - take action and contact us to resolve your situation."
In New York State, 96 percent of taxes are paid by businesses and individuals who voluntarily meet their tax responsibilities, the Tax Department noted. The remaining 4 percent is collected through the Tax Department's audit, collections and criminal investigations programs.
October 21, 2013
By Jim Efstathiou Jr.
(Bloomberg) When construction slowed during the recession, some companies hired workers and wrongly designated them as independent contractors to avoid paying insurance, taxes, fair wages and overtime.
Danny Odom, chief operating officer of Odom Construction Systems, Inc. in Knoxville, Tennessee, says he wouldn’t even though the decision put the company of about 225 employees at a disadvantage as the practice would shave about 30 percent off his labor costs. He testified in support of legislation that went into effect July 1 allowing the state to fine competitors who misclassify employees.
“It’s principle for us,” Odom said in an interview. “We weren’t willing to stick our heads in the sand. It’s exploiting those guys and we just don’t want to make money off of people that are being exploited.”
States from New York to California are taking steps to crack down on employers who improperly classify their workers or fail to declare their income. Thirty states have laws on worker misclassification, up from 23 in 2010, according to Construction Citizen, a website that says it seeks to advance social responsibility in the industry.
“There was money to be had,” Linda Donahue, senior extension associate with The Worker Institute at Cornell University in Ithaca, New York, said in an interview. “The success at identifying those employers has led to pretty substantial revenue for the states.”
An employer can save on average $3,710 annually in employment taxes for each worker earning a salary of $43,007, according a June 14 report from the Treasury Inspector General for Tax Administration.
“The misclassification of employees as independent contractors is a nationwide problem affecting millions of workers that continues to grow,” according to the report.
To recover lost revenue states must first identify such workers. In May, Connecticut said that after a 12-month audit it had reclassified 3,487 workers and uncovered $68.2 million in unreported payroll representing $1.3 million in lost payroll taxes. In February, a New York State task force said it found 20,200 instances of workers treated as contractors in 2012, representing more than $282.5 million in unreported wages.
Massachusetts identified 5,491 misclassified workers last year, according to Lauren Jones, a spokeswoman for the state Department of Unemployment Assistance. That contributed to $46 million in unreported wages.
“It is fraud plain and simple that drains governments at every level of much needed revenue,” Sarah Leberstein, a staff attorney with National Employment Law Project in New York, said in an interview.
Investigations at the state level back up the latest national audits, which suggest the problem is worsening. A Department of Labor study of nine states in 2000 found that up to one third of employers misclassified workers. In 1984, an Internal Revenue Service report put the figure at 15 percent, leading to 3.4 million misclassified workers and a $1.6 billion revenue loss. The agency is in the process of updating its estimates.
“There’s just a general increase in lawlessness among employers,” said Ross Eisenbrey, vice president of the Economic Policy Institute, a Washington-based nonprofit group affiliated with organized labor.
In Tennessee, the growth of the construction industry led to worsening wages and unregulated workplace arrangements, according to a 2010 report co-authored by William Canak, professor of sociology at Middle Tennessee State University.
Using U.S. Labor Department data, the report found that 9,098 construction workers in Tennessee were misclassified in 2006, leading to losses in unemployment insurance payments of up to $14.9 million and missed workers compensation premiums of as much as $91.6 million.
In addition, federal income tax loss for 2007 filings was high as $73.4 million while Social Security and Medicare losses ranged from $7.8 million to $42 million. On-the-job construction deaths reached 33 in 2008, indicating “a strong correlation between construction fatalities and the characteristics of the underground economy,” according to the report.
Even though they have been mislabeled, workers dubbed independent contractors are liable for taxes and fees that employers would otherwise be responsible to cover.
Workers often don’t pay, according to Matt Capece, a representative of the general president of the United Brotherhood of Carpenters who investigates payroll fraud. The tax revenue loss is compounded by employers who pay their workers off the books, shielding that income from states and the IRS.
Misclassification is prevalent in the construction industry where independent contractors often work alongside regular employees.
Contractors own their own business, work for different customers, control their hours, and are responsible for a portion of their payroll taxes, unemployment tax, or workers’ compensation insurance.
George Perry, a construction worker from Dayton, Ohio, did not fit that description. Still, he said he agreed in 2010 to be labeled an independent contractor as a condition for work building housing for the homeless under a federal grant.
“I went along with it because I felt my back was up against the wall,” Perry, 57, said in an interview. “I have a family. My fiance was in school. I’m the only bread winner.”
Perry said he was initially paid $10 an hour, less than half of the prevailing wage for the type of work he was doing. He and his co-workers were told to file tax returns as if they were independent contractors or face layoffs.
The following year he was hurt on the job, leaving him unable to perform heavy work. After being terminated, he was denied unemployment benefits because he was wrongly labeled a contractor.
“There’s all kinds of losers and victims here,” Capece said in an interview. “Of course the workers. Good employers. State and federal governments are losing revenue.”
General contractors often use workers supplied by labor brokers who process paychecks and distribute tax forms, Capece said. Employers and labor brokers may use check cashing companies to hide payments to misclassified workers.
“It’s a great system for the specialty contractor because they get the low labor rate of the lawbreaking labor subcontractor, plus they use that subcontracting relationship as a shield for liability,” Capece said.
Employers that refuse to use mislabeled workers may have higher labor costs than competitors and are often underbid on construction projects.
“It’s going to take a little time for the investigators to become savvy enough to understand what they need to see,” said Tennessee construction company executive Odom. “They’re going to have to learn what they need to look for when they go onto a job site. A lot of them have had their head in the sand.”
By Gene Marks
I love my mom. But she's not always the smartest when it comes to making financial decisions. Case in point: Just last week, and without telling me, she leased a new Honda Civic.
I wish I had known she was going to do this, because if I did I would have strongly advised her otherwise. Leasing a car is rarely a smart financial move.
To get the deal done, she had to cough up a few thousand dollars in up-front fees (and got a ridiculously low trade-in on her 2006 Mini Cooper with less than 30,000 miles on it). She's now paying a monthly fee. She's still responsible for all the maintenance. And when the term ends in three years, she'll have to turn the car in. Leasing a car never makes good financial sense, particularly when you're buying Hondas, which last a long time and have a great resale value. She could've just as well bought the car and financed it with a low-interest bank loan. Then she would have been able to drive it forever. Ask any financial professional: This was not a great decision.
So why aren't we applying the same logic when it comes to our technology? I've written about this before. So here's another angle.
Say you're running an established business with 20 employees. Your server, which houses your primary business applications, is showing its age. You don't want to replace your applications -- they're satisfactory and the cost of migration is too much. So do you buy a new server or "lease" one in the cloud? There are plenty of options nowadays: Amazon's EC2, Rackspace, Microsoft's Azure, Dell Cloud Services or one of the myriad of cloud hosting companies. Many smart people in the IT field will tell you that it's a better long-term decision to move your data to the cloud. They generally give three big reasons:
• It's scalable. "The cloud offers enterprise redundancy at SMB prices," said Dave Sobel, director of partner community at Level Platforms (an AVG company). "Cloud solutions are built around the idea of robust, fully redundant, highly scalable environments, and then offered as a service. This kind of environment is expensive to build for an SMB, but available just on demand based on what is needed. Buying servers requires building a system that has the capacity for multiple years and all potential growth. Using a cloud system allows you to just purchase what you need."
• It's better protection. "With technology as it is today (mobile devices, wireless connectivity and industry/policy changes), it's a big challenge for a small business to keep up with all of the major issues associated with security, virus and data protection, and compliance/policy changes," Preston James, director of sales and business operations for the Dell Center for Entrepreneurs, told me. "Without being proactive with these key areas, a small business is likely to end up closing its doors or will have a very difficult recovery if something catastrophic were to happen to the business. You have to have the right people (specialists) and they have to be readily accessible to serve you today and also tomorrow as you continue to grow."
• The costs are known. "With the cloud, you will have a stable capital expense model, allowing you to manage your finances with complete transparency, which is a boon for small businesses," James also said. "The cost in the early stages will be very affordable, and as the business grows, the costs will likely scale with the business, and can be in alignment with the business growth, so it's not taking out a major chunk of the operating expenses to run the business."
It's all good. It's all true. Forbes contributor Louis Columbus did a great job rounding up all the recent cloud computing forecasts and the general consensus is: Cloud usage among SMBs is significantly growing. And no one's denying that cloud-based services are the future. I get it.
But still ... does it make financial sense this year to replace that old server by moving to the cloud? Isn't this similar to leasing that new car instead of buying? For most of my clients this year, I'm seeing the opposite trend. Like buying a new car, many of them are finding it's just plain cheaper to buy another server! Sure, there are all the valid reasons tech people give for going to the cloud. The dollars-and-sense reality to many small-business owners I know is that moving their business to the cloud makes about as much sense as leasing a car. Here's why. Buying a new server costs about $3,000-$5,000. Having a tech guy visit once or twice a month to apply updates, do maintenance and fix problems will cost another $5,000-$7,000 per year. Compare that to renting a server for about $100 per month per user (which is the typical cost of doing this today) for a 20-person company. That's $24,000 per year! And you still need the tech guy to monkey with your people's devices, troubleshoot connection issues, replace routers and address local security issues. Most small-business owners I know have been operating this way for years and (knock wood) don't run into major problems. The smarter ones, at the very least, make sure they've got a good redundant backup process going using both onsite media and inexpensive cloud-based backup services like Carbonite and Mozy (psst ... the really smart ones actually test their backup services at least monthly too!).
You may be a startup. You may have few IT resources. Your workforce may be spread out around the world. You may be scrapping your existing systems and migrating to a fully cloud-based application because of its features. Your operating model may be one that depends on outsourcing any process that's not mission-critical. You may not be able to qualify for financing. In these cases, a fully cloud-based system may be the best answer for you. The arguments made by Sobel and James make a lot of sense. But for many others, this may not be the case.
Because remember: The tech industry wants you to rent. For the same reason that the auto industry wants you to lease. As long as you're willing to take ownership of a server or a new car, then buying and owning means less money for them (and more for you) over the long term. Leasing a car may be easy and sexy but is usually not a good financial move over the same period of time. My mom doesn't get this, but I'll give her a pass because she's just a little old lady. How about you?
October 18, 2013
by Michael Menor, Network Technician
Malware is short for “malicious software.” It includes viruses and spyware that get installed on your computer, phone, or mobile device without your consent.
These programs can cause your device to crash and can be used to monitor and control your online activity. Criminals use malware to steal personal information, send spam, and commit fraud.
Scam artists try to trick people into clicking on links that will download malware and spyware to their computers, especially computers that don’t use adequate security software. To reduce your risk of downloading unwanted malware and spyware:
Keep your security software updated. At a minimum, your computer should have anti-virus and anti-spyware software, and a firewall. Set your security software, internet browser, and operating system (like Windows or Mac OS) to update automatically.
Don’t click on any links or open any attachments in emails unless you know who sent it and what it is. Clicking on links and attachments – even in emails that seem to be from friends or family – can install malware on your computer.
Download and install software only from websites you know and trust. Downloading free games, file-sharing programs, and customized toolbars may sound appealing, but free software can come with malware.
Minimize “drive-by” downloads. Make sure your browser security setting is high enough to detect unauthorized downloads. For Internet Explorer, for example, use the “medium” setting at a minimum.
Use a pop-up blocker and don’t click on any links within pop-ups. If you do, you may install malware on your PC. Close pop-up windows by clicking on the “X” in the upper right-hand corner of the title bar.
Resist buying software in response to unexpected pop-up messages or emails, especially ads that claim to have scanned your computer and detected malware. That’s a tactic scammers use to spread malware.
Talk about safe computing. Tell your kids that some online actions can put the computer at risk: clicking on pop-ups, downloading “free” games or programs, opening chain emails, or posting personal information.
Back up your data regularly. Whether its text files or photos that are important to you, back up any data that you’d want to keep in case your computer crashes.
Monitor your computer for unusual behavior. Your computer may be infected with malware if it:
Other warning signs of malware include:
Get Rid of Malware
If you suspect there is malware on your computer, take these steps:
If your computer is covered by a warranty that offers free tech support, contact the manufacturer.
Before you call, write down the model and serial number of your computer, the name of any software you’ve installed, and a short description of the problem.
Telephone and online help generally are the least expensive and most time efficient, but you may have to do some of the work yourself. Bringing the computer to our office is usually less expensive than having a technician visit your business or home.
Tech Experts is southeast Michigan's leading small business computer support company. A Microsoft Gold Certified Partner, Tech Experts is your one-stop IT service company, offering "No Problem Support" to more than 200 businesses and individuals throughout southeastern Michigan and northwestern Ohio. Located at 15347 South Dixie Highway, Monroe, MI, 48161, Tech Experts can be reached at (734) 457-5000.
IRS: Shutdown to Delay Tax Season
October 22, 2013
By Daniel Hood
The Internal Revenue Service announced on Tuesday that it will delay the start of the 2014 tax filing season by as much as two weeks due to delays caused by the recent closure of the federal government.
Citing the need for "adequate time to program and test tax processing systems," the service announced that it expected a one- to two-week delay in the start of tax season, and that it would start accepting and processing 2013 individual tax returns no earlier than Jan. 28, 2014, and no later than February 4. Tax season had been expected to start on January 21.
Acting Commissioner Danny Werfel said in the statement that the service was exploring options to shorten the expected delay, but also noted, "Readying our systems to handle the tax season is an intricate, detailed process, and we must take the time to get it right. The adjustment to the start of the filing season provides us the necessary time to program, test and validate our systems so that we can provide a smooth filing and refund process for the nation's taxpayers."
The 16-day government shutdown came during the peak period for preparing IRS systems for the upcoming tax season, which involves programming, testing and deployment of more than 50 systems.
About 90 percent of IRS operations were closed during the shutdown, with some major workstreams closed entirely, and the IRS noted that it is also facing extra demands due to the need for systems to prevent refund fraud and ID theft -- and that it is still dealing with a backlog of over 1.4 million pieces of correspondence that piled up during the shutdown.
The official start date will be announced in December.
IRS Hasn’t Made Progress Reducing Improper EITC Payments
Washington, D.C. (October 22, 2013)
By Michael Cohn
The Internal Revenue Service estimates that between 21 and 25 percent of Earned Income Tax Credit payments were issued improperly during fiscal year 2012, or approximately $11.6 billion to $13.6 billion, and those estimates may be understated because laws that extended increases in the EITC were not factored into the estimates, according to a new report.
The report, publicly released Tuesday by the Treasury Inspector General for Tax Administration, found that the IRS has not made significant headway on reducing EITC improper payments despite earlier findings of problems and an executive order, according to a new report. Executive Order 13520, “Reducing Improper Payments and Eliminating Waste in Federal Programs,” requires TIGTA to assess the IRS’s compliance with the executive order on an annual basis.
As part of its audit, TIGTA also found that the IRS has not established annual improper payment reduction targets as required by law. The IRS is also not in compliance with the quarterly reporting requirement for high-dollar improper EITC payments —that is, payments totaling more than $5,000—to TIGTA and the Council of the Inspectors General for Integrity and Efficiency.
IRS management stated that they recently met with the Office of Management and Budget and agreed to develop supplemental measures and indicators in lieu of reduction targets. However, the IRS did not indicate when these measures would be in place.
“The IRS should be commended for implementing numerous processes to educate Americans and identify and prevent improper EITC payments,” said TIGTA Inspector General J. Russell George in a statement. “Unfortunately, it is still distributing more than $11 billion in improper EITC payments each year and that is disturbing. The IRS must do a better job of reining in improper payments in this and in other programs.”
TIGTA recommended that the IRS develop processes to identify high-dollar improper EITC payments and report the information to TIGTA and the Council as required by Executive Order 13520.
IRS management agreed with TIGTA’s recommendation and plans to take appropriate corrective actions. “We agree with the report recommendation that the IRS should develop a process to identify and report on high-dollar improper Earned Income Tax Credit payments and report the information to TIGTA and the Council of Inspectors General on Integrity and Efficiency,” wrote IRS CFO Pamela J. LaRue.
An IRS spokesperson also sent a comment Tuesday to Accounting Today in reaction to the TIGTA report. “The IRS appreciates the Inspector General’s acknowledgement of all our work to implement processes that identify and prevent improper EITC payments,” said the IRS in the statement. “Every year, the IRS conducts 500,000 EITC audits as part of a broader enforcement strategy, and EITC claims are twice as likely to be audited as other tax returns. The IRS protects nearly $4 billion in improper claims each year and is committed to continuing to work to reduce improper claims. As the data in the TIGTA report shows, there has been a significant decline in the improper payments since 2010. To that end, the IRS continues to work with OMB to develop supplemental measures to better gauge the impact of IRS’ compliance and outreach efforts. While federal privacy laws restrict the data that can be provided, IRS has also worked with OMB to develop a quarterly summary report of overpayments that will meet the reporting requirements of Executive Order 13520.”
washington, D.C. (October 31, 2013)
By Jeff Stimpson
The IRS is warning consumers about a "sophisticated" phone scam targeting taxpayers, including recent immigrants, nationwide.
Victims are told they owe money to the IRS and that they must pay promptly through a pre-loaded debit card or wire transfer.
If the victim refuses, they are threatened with arrest, deportation or suspension of a business or driver's license. In many cases, the service reports, the caller becomes hostile and insulting.
"This scam has hit taxpayers in nearly every state in the country," said IRS Acting Commissioner Danny Werfel in a statement. "We do not and will not ask for credit card numbers over the phone nor request a pre-paid debit card or wire transfer.
"If someone unexpectedly calls claiming to be from the IRS and threatens police arrest, deportation or license revocation if you don't pay immediately, that is a sign that it really isn't the IRS calling," Werfel said, adding that the first IRS contact with taxpayers on a tax issue is likely to occur via mail.
Other characteristics of this scam include:
The IRS offered these tips for anyone getting a phone call from someone claiming to be from the IRS:
Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.
The IRS does not initiate contact with taxpayers by e-mail to request personal or financial information, nor does it ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts.
Recipients should not open any attachments or click on any links contained in a potentially bogus IRS message. Instead, forward the e-mail to email@example.com.
October 31, 2013
By Michael Cohn
The Internal Revenue Service issued its annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes for 2014.
Revenue Procedure 2013-35 provides details about the various annual adjustments. The tax items for tax year 2014 of greatest interest to most taxpayers include the following dollar amounts:
• The tax rate of 39.6 percent affects singles whose income exceeds $406,750 ($457,600 for married taxpayers filing a joint return), up from $400,000 and $450,000, respectively. The other marginal rates—10, 15, 25, 28, 33 and 35 percent—and the related income tax thresholds are described in the revenue procedure.
• The standard deduction rises to $6,200 for singles and married persons filing separate returns and $12,400 for married couples filing jointly, up from $6,100 and $12,200, respectively, for tax year 2013. The standard deduction for heads of household rises to $9,100, up from $8,950.
• The limitation for itemized deductions claimed on tax year 2014 returns of individuals begins with incomes of $254,200 or more ($305,050 for married couples filing jointly).
• The personal exemption rises to $3,950, up from the 2013 exemption of $3,900. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $254,200 ($305,050 for married couples filing jointly). It phases out completely at $376,700 ($427,550 for married couples filing jointly.)
• The Alternative Minimum Tax exemption amount for tax year 2014 is $52,800 ($82,100, for married couples filing jointly). The 2013 exemption amount was $51,900 ($80,800 for married couples filing jointly).
• The maximum Earned Income Tax Credit amount is $6,143 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,044 for tax year 2013. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
• Estates of decedents who die during 2014 have a basic exclusion amount of $5,340,000, up from a total of $5,250,000 for estates of decedents who died in 2013.
• The annual exclusion for gifts remains at $14,000 for 2014.
• The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) remains unchanged at $2,500.
• The foreign earned income exclusion rises to $99,200 for tax year 2014, up from $97,600, for 2013.
• The small employer health insurance credit provides that the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of 10 and the employer’s average annual wages in excess of $25,400 for tax year 2014, up from $25,000 for 2013.
Details on these inflation adjustments and others not listed in this release can be found in Revenue Procedure 2013-35, which will be published in Internal Revenue Bulletin 2013-47 on Nov. 18, 2013.
Last week, the Obama administration extended the deadline for individuals to sign up for health insurance before facing tax penalties under the Affordable Care Act (“ACA”) to March 31, 2014. The announcement delays the tax provisions associated with the ACA and gives individuals extra time to purchase health insurance. The delay is a welcomed reprieve for individuals who have struggled to purchase health insurance amidst the failed launch of HealthCare.gov earlier this month.
In practice, an individual must sign up by the 15th of a given month in order for health insurance to start the first day of the next month. Therefore, to have health insurance in place by the March 31, 2014 Short Coverage Gap deadline, an individual would have to apply for insurance by February 15, 2014. If an individual applied for and purchased health insurance coverage between February 16, 2014 and March 31, 2014, he or she would be subject to penalties under the ACA.
Under the ACA and accompanying tax regulations, individuals are required to have health insurance coverage in place starting in 2014. After January 1, 2014, a penalty is imposed on any individual who does not have health insurance coverage for one or more months. However, individuals are protected from the ACA penalties during “Short Coverage Gaps”. A Short Coverage Gap is a continuous period of less than three months wherein the individual does not have minimally acceptable health insurance coverage. In effect, the Short Coverage Gaps allow individuals up to three months to obtain appropriate health insurance coverage under the ACA.
Open enrollment for health insurance coverage on the Health Insurance Marketplace / Exchange is from October 1, 2013 through March 31, 2014. Before last week’s announcement, the Short Coverage Gaps allowed individuals to avoid ACA penalties in the first quarter of 2014. However, it was possible for individuals to purchase insurance during the open enrollment period and still be subject to the ACA penalties. If an individual purchased health insurance that did not go into effect until after March 2014, the individual would incur a penalty for exceeding the Short Coverage Gap protection.
On October 28, 2013, the Center for Consumer Information and Insurance Oversight (“CCIIO”) released a Q&A regarding the extension of the deadline for individuals to sign up for health insurance before facing tax penalties under the ACA. In this release, CCIIO stated that “the duration of the initial open enrollment period implies that individuals have until the end of the initial open enrollment period to enroll in coverage through the new Marketplaces while avoiding liability for [tax penalties]“. As such, the Department of Health and Human Services is exercising its authority to establish an additional hardship exemption to provide relief for individuals who enroll in health insurance after February 15, 2014 but before the close of initial open enrollment for the Marketplaces. The hardship exemption can be claimed on an individual’s federal income tax return in 2015 without the need to request an exemption from the Marketplace.
It remains to be seen how the continued technological complications surrounding the Marketplace will affect the individual mandate. It is possible that future delays will be announced. In addition, it is likely that small businesses will see another delay later this week to the implementation of the SHOP. Previously slated to open on October 1st, small business enrollment in insurance products through the SHOP was delayed until Friday, November 1, 2013.
© 2013 Michael P. James, J.D., M.B.A., CSSGB
Why Wealthiest Are In the Taxman’s Crosshairs
October 23, 2013 • A. Gary Shilling
After the recent recession, the personal-taxes-to-personal-income ratio dropped well below the 12.3 percent long-run average, a casualty of the tax cuts, depressed household incomes and the weak recovery. In combination with depressed corporate tax collections and increased federal spending -- especially in 2009, when outlays equaled 6 percent of gross domestic product -- these forces pushed the federal deficit to more than $1 trillion a year.
At the time, the widespread conviction in and out of Washington was that “fat cat” Wall Street bankers, as President Barack Obama labeled them in 2009, were responsible for the financial collapse, prolonged recession and slow recovery. Americans at the top have regained all they lost and then some; many lower on the income scale, however, remain mired in high unemployment and declining real wages.
Long-term unemployment leapt to record levels. The number of those who prefer full-time jobs but are offered only part-time work skyrocketed to an all-time high. And job openings began to grow much faster than new hires as cautious employers became choosy. As of August 2013, payroll employment was 1.9 million below its January 2008 peak, even though the working-age population grew by 13.1 million in that period. Payroll growth slowed in September, with 148,000 workers added, following a revised 193,000 gain in August, according to Labor Department data released yesterday.
Furthermore, the wealthy, with their large stock holdings, have benefited most from the bull market that began in March 2009. Americans who aren’t in the highest income brackets tend to have most of their wealth concentrated in their homes; in 2010, the value of the residences of the top 10 percent was only five times that of the bottom 20 percent. The stock holdings of the richest 10 percent were 50 times greater. And even with the recent rebound, the median prices of single-family houses are still 24 percent below the April 2006 peak.
Given all this, it seemed inevitable that taxes would go up. At the beginning of this year, the Social Security tax paid by employees returned to 6.2 percent from 4.2 percent on income less than $113,700. But other changes affected only high-income earners: The rate returned to 39.6 percent from 35 percent on couples’ incomes of more than $450,000; capital-gains and dividend rates rose to 20 percent from 15 percent. For joint filers with more than $300,000 in adjusted gross incomes, personal exemptions were phased out and as much as 80 percent of itemized deductions were eliminated.
As is often the case when the personal-taxes-to-personal-income is low, the Internal Revenue Service has accelerated audits of rich taxpayers. It has even created a separate division, the Global High Wealth Industry Group, to enforce compliance. In the 2012 fiscal year, the IRS audited 5.4 percent of tax returns of Americans who earned between $500,000 and $1 million, up from 3.4 percent in 2011. Audits of those in the $1 million to $5 million category increased to 12 percent from 6.7 percent; 21 percent of people reporting $5 million to $10 million in income were audited, compared with 12 percent for 2011.
More recently, the IRS sent 20,000 letters to small-business owners, seeking to establish whether they were underreporting their business income. The tax-collection agency is taking advantage of a 2008 law that gives it broader access to merchants’ credit- and debit-card records, which it can compare with tax returns. Unusually large credit-card transactions suggest underreporting of cash sales. Underreported income constitutes the bulk of the so-called tax gap, the difference between what taxpayers owe and what they pay, according to the IRS. In 2006, the latest data available, the total gap was $450 billion.
The IRS is also pursuing Americans with undeclared investment accounts in Switzerland and other tax havens. The Swiss government protected the country’s banks from disclosing information on tax dodgers to U.S. authorities. Threats to cut off those banks from business in the U.S. and cooperation from a former employee of UBS AG forced a change of policy.
In July 2008, a U.S. Senate investigation found that the Treasury loses about $100 billion a year to offshore tax evasion; UBS was found to have hidden about $20 billion belonging to 20,000 Americans. UBS subsequently agreed to hand over the names of 4,450 U.S. account-holders and pay a $780 million fine. In 2011, Credit Suisse Group AG also agreed to disclose the names of clients suspected of dodging U.S. taxes.
Switzerland is the biggest offshore banking haven, with $1.8 trillion in foreign assets under management. Five percent of the total is owned by Americans. Swiss banks are now rushing to cooperate with the IRS and tax authorities in other countries. The government recently agreed to share data for tax purposes with almost 60 countries by signing the Organization for Economic Cooperation and Development’s tax information agreement. Switzerland also has agreed to follow U.S. law requiring foreign banks to provide data on U.S. accounts.
Banks in other tax havens such as Andorra, Liechtenstein, Singapore, the island of Jersey, the British Virgin Islands, the Cayman Islands and Monaco are also opening to U.S. tax authorities. And the IRS is pursuing money hidden in Caribbean, Israeli and Indian banks. Other countries such as Austria and Luxembourg have relaxed bank secrecy laws.
In 2008, the IRS established an amnesty program that allowed Americans with undeclared offshore accounts to avoid criminal prosecution by paying all taxes owed, plus interest for the past six years and a penalty of 20 percent of the accounts’ highest values. About 15,000 tax dodgers entered the program and 23,000 more signed up for a more punitive effort in 2011. The U.S. has collected $2.2 billion from the 2009 amnesty cases that were closed as of September 2011, with average revenue per case of $80,000. For 2009-2012, the IRS collected $5.5 billion in unpaid taxes and penalties, and it expects to collect $5 billion more.
Yes, the recent tax increases have been aimed at the “fat cats.” It is also true the IRS has stepped up audits of the wealthy and small-business owners and hotly pursued tax dodgers with foreign investment accounts.
Yet the invisible hand that underpins shifts in taxation has also probably been at work in pushing up the personal-taxes-to-personal-income ratio because the increase in Social Security taxes on employees hit lower-income people hardest in relation to their pay. Of course, the $1 trillion federal deficits were also an inducement for higher government revenue.
The invisible hand overcame the declines in real weekly wages and real median incomes. It also prevailed over the still-depressed prices of houses, the biggest asset for all but the richest. About two-thirds of homeowners have mortgages, and those with middle and low incomes account for the greatest share. The home equity of mortgage holders has risen along with house prices recently. Still, on average, it’s only 23 percent, less than half what it was in 1983.
Households are still overburdened with debt. The total has fallen to 104.7 percent of after-tax personal income in the second quarter, from 130 percent, but it still is well above the 65 percent norm in the early 1980s. Furthermore, the decline so far is almost entirely due to falling home-mortgage debt, largely a result of write-offs of bad mortgage loans. Much smaller credit-card and home-equity revolving debts have declined, though student loans have ballooned.
Household net worth has risen in relation to after-tax income, but remains below the peaks of the late 1990s and the mid-2000s. Moreover, 43 percent of the increase in the ratio since the recessionary low in the first quarter of 2009 is due to higher equity prices and, as discussed earlier, individual stockholders are predominantly high-income people. Only 8 percent of the increase is the result of the appreciation of wider ownership of real estate.
Copyright 2013 Bloomberg. A. Gary Shilling is a Bloomberg View columnist and president of A. Gary Shilling & Co. He is the author of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation. This is the second in a three-part series. Read Part 1.
October 29, 2013
By Bonnie Buol Ruszczyk
At this point, most companies and even accounting firms have a profile on some sort of review site like Yelp, CitySearch or Google Local.
The idea behind these sites and many more of their ilk is to give the customers and clients of a company the opportunity to share their experiences, good or bad, with anyone who is looking for a similar provider. With the power of user reviews outpacing advertising exponentially, it's a good strategy.
Along with the creation of a profile on these sites comes the temptation to "pad" them with fake reviews. I've seen very reputable firms do this without blinking an eye. In fact, according to Gartner, 10 to 15 percent of online reviews are fake. But before you start paying your intern to create phony profiles and rave about your services, think twice.
The practice of creating and posting fake reviews is called "astroturfing" and it got 19 companies in New York slapped with fines ranging from $2,500 to $100,000. You read that correctly; you can be fined for this behavior, and in New York at least, authorities are cracking down hard.
Think the Office of the New York Attorney General is overreacting? I'm here to say he's not.
First, it's false advertising, pure and simple. It's really not that different than Splenda saying it's "made from real sugar" or Airborne claiming to ward off colds. Those companies and many others have had to pay dearly, so why shouldn't those who are creating fake testimonials?
Second, it creates skepticism about the entire client review system. This is a meaningful loss, because the system has such a lot to offer both businesses and consumers. It's really a brilliant idea to have actual users of a product or service share their experience with others. Like many, I tend to put much more stock in user reviews than any other type of advertising. In fact, public feedback plays heavily into the hotels I book, restaurants I try and service providers I choose. If companies are allowed to continue posting fake reviews, the entire system will eventually implode.
Third, it's lazy and shady behavior, and if you are busted, it will certainly harm your brand. If you are willing to cheat at this, where else are you cutting corners? This is particularly pertinent for accounting firms, since you are, in essence, selling trust. Once a cheater, always a cheater applies to more than marriage infidelity in my book.
Instead of taking the low road, why not create a true, multipronged marketing plan for your firm? It's smart to incorporate online review sites into your strategy, but let the reviews come from your real customers. Just ask your clients to post a review! There is absolutely nothing wrong with making this type of request, and real clients tend to say even better things than you can write yourself.
What do you think about these fines and what they mean for the online review site industry? Overreaction or long-overdue consequence?
Bonnie Buol Ruszczyk is president of bbr marketing, a firm that provides marketing strategy, training and tactical implementation for professional services firms. She can be contacted at www.bbrmarketing.com, or you can read bbr’s blog posts at www.bbrmarketing.com/blog or www.marketingideasforcpas.com.
How to Fix 10 Communication Mistakes Employees Make
By Marvin Brown
Whether you're engaging in chitchat with co-workers on the first day of your new job or talking to a prospective client to land a potential sale, you need good communication skills in the workplace.
All employees experience awkward moments, such as being alone in an elevator with their boss for the interminable 12-floor ride or getting tongue-tied in a particularly competitive and fast-paced departmental meeting.
Don't worry! Even if you're an introvert, being a great talker is a learnable skill. All it takes is a few techniques and a little practice. Here are 10 common communication fixes you can employ.
1.Succumbing to lazy talk. Lazy talk consists of clichés or fillers that are repeated so often we don't even hear ourselves saying them. Examples include: you know and like. Overusing the word thing when another word would be more descriptive and using vague expressions such as etc., whatever, and stuff like that are also lazy talk.
The fix: Imagine that your words have value. Where vague and meaningless words are worthless, specific, interesting words cost more. Make your speech more valuable by minimizing lazy speech.
2.Creating conversational dead-ends. If conversation doesn't go back and forth, it serves little purpose. We create conversational dead-ends by asking questions that have single-word answers. "How are you?" and "Hi" are two common examples.
The fix: When engaging in small talk, ask open-ended questions that spark meaningful exchanges. Examples: "What did you do that was exciting this weekend?" or "How do you stay so cheerful on a Monday morning?"
3.Letting a subject pass. People we chat with almost always offer an opening — conversationally speaking, but if you're not looking for these, an opportunity to go deeper may pass you by.
The fix: If someone says, "Thanks for noticing I lost weight. It's always a battle to stay in shape because I love to cook," instead of nodding and saying nothing. You could follow up with a question or statement about dieting, fitness, or cooking.
4.Offering an opinion as fact. We've all been guilty of making declarations that sound as though they should be carved in stone. "That's the best Italian restaurant around," or "sky diving is the greatest adventure.”
The fix: To avoid being labeled a know-it-all by your co-workers, colleagues and clients, all you have to do is preface such statements with "It seems to me" or "I've come to believe" or "I think."
5.Trying to be overly charming. Do you feel the need to tell jokes, throw around fancy words and be the life of the cubicle? Being overly charming can backfire.
The fix: Good conversationalists talk about plain, simple subjects when trying to get to know and get along with other people. Forget about being super eloquent, clever, or pretentious. Keep your exchanges simple and direct. Trying to impress others will only come across as disingenuous and fake. It's alienating to others.
6.Forgetting to speak body language. You may be distracted at work and merely mumble a hello when a co-worker walks past. Or when you meet someone new, you simply announce your name and that's your greeting. Body language is as important as verbal language when it comes to making first impressions, giving your message impact and winning people's trust.
The fix: When greeting a work associate, look up from what you're doing, make eye contact and smile. You've just told that person with your body language, "You're worthwhile and I'm glad to see you." When meeting someone for the first time, say your name while extending a firm handshake; research shows that person is 75 percent more likely to remember you.
7.Exiting awkwardly. It's common to have difficulty ending conversations graciously with someone we've just met, not to mention those annoying people who corner us at the water cooler where we can't easily escape. Don't make up an untrue excuse, such as a phone call you're (not) expecting, or say, "Well, uh, I gotta go." If you do, it will create bad will.
The fix: Make the other person feel good before you say goodbye. "Richie, it's been a pleasure (smile, offer your hand), but I have to get back to my office. Hope to catch you later."
8.Spoiling a compliment. Many of us have a difficult time accepting compliments. Two of the most common mistakes people make are contradicting the complimenter who tells you that you look great, "Nah, I'm a mess today," or discounting his or her words by bouncing it right back, "You too."
The fix: Take it in, and let the other person know that his or her gesture of generosity is meaningful. Smile, and say something like, "Thanks! You made my day."
9.Texting, not talking. How many times have you been in the elevator or break room where people who know each other are focused on their smartphones? This sends a rude message to others that they don't matter. In business, it's a missed opportunity to connect and possibly learn something.
The fix: Save texting and e-mailing for times when you're alone or actually in the presence of strangers, such as on the long commuter ride home on the train. Practice the art of small talk by asking a polite question about a topic — a current event, perhaps, or a specific detail about that person's family or interests. "Have you been golfing yet this year?"
10.Taking criticism poorly. There's nothing worse than an employee or co-worker who won't hear feedback, gets defensive, and thus impedes progress at work.
The fix: Try to listen to what the other person is saying about your work, not about you personally. Then respond with a simple statement that shows appreciation, such as "Thank you for pointing that out to me," or "That's really helpful; you just did me a big favor."
About the Author
Marvin Brown is an expert in business communication strategies, a sought-after speaker, and the author of the instant classic How to Meet and Talk to Anyone, Anywhere, Anytime: Simple Strategies for Great Conversations. Marvin can be reached at firstname.lastname@example.org. Interested readers can learn more at www.howtomeetandtalktoanyone.com.
Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.
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