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Jobs Now or Later? Comparing Clinton’s and Trump’s Tax Plans



Donald Trump’s proposed tax plan could provide a short-term boost to the economy before costing more than 690,000 jobs over a decade, while Hillary Clinton’s plan could send job-creation in the opposite direction -- first down, then up, according to a new policy report.

The main reason for the differing outcomes is the plans’ effects on the federal debt, according to the analysis by economists and computer engineers at the Wharton School of Business at the University of Pennsylvania -- which didn’t consider their spending proposals. Trump, the Republican presidential nominee, proposes tax cuts for businesses and individuals, while Clinton, the Democratic nominee, proposes tax increases on the highest earners.

While Trump’s plan stimulates more growth and jobs “in the very short run, it under-performs both current policy and Clinton within a decade, due to higher debt,” a synopsis of the report says. Success for the Trump plan “hinges critically on finding substantial cuts to government spending down the road,” according to the synopsis.

The brief report was prepared by the Wharton School officials in tandem with the Washington-based Urban-Brookings Tax Policy Center.

It found that under Clinton, growth in gross domestic product, a measure of total economic health, would fall 0.19 percent in 2018, when measured against growth expected without the effects of her plan. But by 2027, Clinton’s plan would produce GDP growth of 0.4 percent above the baseline, and by 2040, 1.19 percent above the baseline.

Trump’s plan would grow the economy by 1.12 percent above the baseline in 2018, but then shrink it by 0.43 percent in 2027 and by 6.73 percent in 2040.

The report is based on the “Penn Wharton Budget Model,” a new, proprietary method of calculation that incorporates predictions of the economic effects of tax proposals on human behavior. The group’s method, known broadly as “dynamic scoring,” used data from the Internal Revenue Service, the Federal Reserve, mortality tables and population surveys, among other sources, to model the candidates’ plans.


‘Hotly Debated’

The group also used recent findings by the Tax Policy Center, which is a joint venture by the Urban Institute and the Brookings Institution. The center calculated the effects of both candidates’ proposals on a “static” basis -- that is, without accounting for the predicted effects of human behavior.

The Wharton model also reflected assumptions that growth would come from previously unemployed people getting jobs, rather than from currently employed people working harder. Kent Smetters, the director of the modeling group, said that assumption was “hotly debated” in academic and policy circles.

Under that assumption, Trump’s plan would create 1.7 million new jobs in 2018. But by 2027, his plan would create 692,082 fewer jobs than would the current economy without his tax plan. By 2040, Trump’s plan would mean 11.2 million fewer jobs against the current baseline. Smetters said those figures were “upper limits” of the group’s calculations.

Clinton’s plan would produce 282,012 fewer jobs by 2018 against the baseline, but then create 645,161 new jobs by 2027 and more than 2 million new jobs by 2040, the report said, again using so-called upper limits.

Earlier this month, the Tax Policy Center had found that, on a static basis, Trump’s plan would decrease federal revenue by $6.2 trillion over a decade, and the top 1 percent of earners would receive almost half the benefit of his proposed tax cuts. The Trump campaign sharply criticized that finding; campaign advisers argue that the tax cuts would stimulate economic growth, lessening the revenue cost of the plan.

Moreover, they say, Trump’s plans to overhaul international trade treaties, cut regulations and stimulate the U.S. energy industry would add more growth. He has called for cutting “non-defense and non-entitlement programs” to save almost $1 trillion over the next 10 years.

The tax-policy center also found, in a companion report, that under Clinton’s plan, federal revenue would increase by $1.4 trillion over a decade, with the top 1 percent of earners paying for about 90 percent of her proposed tax hikes -- again, on a static basis. Both the center and the Wharton group describe themselves as nonpartisan.

The Wharton report considered only the candidates’ tax plans; it didn’t measure either candidate’s spending proposals -- or any spending cuts.

The fight over how to determine the cost and economic effects of the candidates’ tax plans has thrust a wonky debate over “scoring” into the mainstream and created an arms race among think tanks and research centers to churn out new models and reports. Dynamic models vary widely -- economists disagree on the best way to construct them. But they tend to make the impact of some tax cuts look less costly to federal budgets over time.

Last year, Congress required the Congressional Budget Office and the Joint Committee on Taxation to use dynamic models in their analyses.



Retroactive Tax on Lottery Winnings Unfair



A New Jersey Tax Court judge has sided with a couple who won $46 million in the state lottery in 2000 and elected to have their winnings distributed in annual installments as a multiyear annuity payment, holding that the state did not have the right to retroactively tax their winnings after passing a new statute.


Plaintiffs Melvin Milligan and Kim Lawton-Milligan, who won the Big Game Lottery jackpot drawing in 2000, opted for 26 annual payouts of $1.77 million. They argued that the 2009 state law making prizes over $10,000 taxable for the first time should not be enforced against their payments in 2009 and subsequent years.

The court granted the Milligans’ motion for partial summary judgment. “The grant of partial summary judgment in favor of plaintiffs on their square corners doctrine is a sufficient basis for reversal of the final determinations of the Director, Division of Taxation denying plaintiffs’ request for a refund of New Jersey gross income tax for tax years 2009, 2010, 2011, 2012, and 2013,” the court stated.

The decision affirms a decision from a year ago denying a motion by the State Lottery to dismiss the complaint against it. If the motion had succeeded, the Division of Taxation would have brought a similar motion, according to Steven Klein, a member at Cole Schotz P.C., who represented the Milligans.

“The judge effectively ruled that under our factual circumstances, and companion cases with slightly different facts, taxpayers should not have to pay tax in spite of the 2009 legislation,” said Klein.  

“The chief reason is that the state was advertising the fact that lottery winnings were tax free,” he added. “It was basically saying ‘Play in New Jersey because we in New Jersey don’t impose income tax.’ That solicitation became part of the agreement between the state lottery and the players.”


The judge also looked at two different fact patterns, Klein noted. “In one case, the taxpayer won at the end of 2008 but didn’t turn the winning ticket in until 2009. New Jersey said that because the winner received the winnings in 2009 it was taxable. In this case it was a lump sum, but since the law wasn’t enacted until June 2009, it didn’t apply.”

“In a third case, the players were a group all from the same company,” Klein said. “They all chipped in and won in early 2009, when there was no law on the books. Since they played before the law was enacted, it didn’t apply to their winnings.”

“We have over 20 other lottery winners that we are representing whose cases have been on hold while we proceeded with these cases,” said Klein. “And there may be others who haven’t retained us yet. The ruling will apply in a host of other cases.”

The judge cited the “square corners” doctrine, according to Klein. “It says that government should turn square corners with its citizens,” he said. “In particular, taxing authorities should turn square corners with taxpayers. The judge felt that to impose this tax under these circumstances would be unfair to these taxpayers.”




Obama Signs Bill to Eliminate Taxes on Olympic Medals



President Obama has signed legislation exempting Olympic and Paralympic athletes from taxes on their medals and winnings.

The House passed legislation known as the United States Appreciation for Olympians and Paralympians (USA Olympians and Paralympians) Act, sponsored by Rep. Bob Dold, R-Ill., last month to exempt the medalists from taxes on their winnings (see House Passes Tax Relief for Olympic Medalists). The vote was nearly unanimous, at 415 to 1.


The Senate passed similar legislation, sponsored by Senators Chuck Schumer, D-N.Y., and John Thune, R-S.D., in July with a unanimous vote (see Schumer Proposes to Exempt Olympic Medals from Taxes). President Obama signed the bill into law last Friday.


The U.S. Olympic Committee awards cash prizes to medal winners—$25,000 for gold medalists, $15,000 for silver medalists and $10,000 for bronze medalists—and those have traditionally been subject to taxes. The IRS considers the money to be income earned abroad, and the monetary value of the medal is also taxable.

The bill exempts the value of medals won and other prizes awarded by the U.S. Olympic Committee from athletes’ taxable income if their income is under $1 million during that year. The bill would not affect taxes on endorsement money or sponsorship income earned by athletes, however. It retroactively applies to the 2016 Olympic and Paralympic Games in Rio De Janeiro, Brazil.

“Our Olympic and Paralympic athletes make tremendous personal sacrifices while training to represent Team USA—most of the time with very little financial help—but until now the IRS has been taxing them on the value of their medal and award,” Dold said in a statement Friday. “Our bipartisan bill has ensured that when Team USA athletes return home with a medal, they will not receive a tax bill from the IRS. Most of these athletes will never sign an endorsement deal or a professional contract, which is why it’s so important that these athletes will no longer be forced to pay a big tax bill when they achieve their Olympic dreams representing the United States.”




Trump Tax Return: Top 9 Questions



This is not about politics.


It's about tax.  

I don’t care who you love or hate; this campaign is a game.  

But we’re not going there in this column.

Trump’s 1995 tax return was released this weekend. And after just two pages in, I came up with nine questions (OK more than nine) that I think need to be answered.

My inner tax geek wants to know!

1.  Is this a timing issue? What happens in the following years?

2.  When Trump got divorced, who kept the losses or did they get split?

3.  What underlying entities produced these losses? Were they partnerships or an LLC, as LLCs were just starting at that time. Knowing what they know now, would these entities still have been chosen as the right vehicles?

4.  What does the tax attributes carryforward schedule look like?

5.  What does the basis schedule look like?

6.  Would the CPA have been able to print all the numbers if he had "downloaded the fonts?" (Remember when tax software used to make you do that?)

7.  Will tax software today work with such big numbers?  Wolters Kluwer, Thomson, and Intuit feel free to chime in here.

8. How much did the CPA get paid to prepare the returns?

9.  Why is the CPA semi-retired at 80? I would think if Trump was my client I would be all-the-way retired.

What is your inner tax geek thinking about this initial look at this supercool complex tax return? Add them here and remember no politics! Save it for Facebook!

Jody Padar, CPA, MST, is the chief executive officer and principal at New Vision CPA Group and the author of The Radical CPA.




Dead Billionaire's Art Stash Gathers Dust amid French Tax Trial



The Wildenstein family of art dealers sold more than 600 pieces since the turn of the century, generating around $300 million in cash to fund their lifestyle, and has works worth nearly three times that much in storage, according to a banker who has intricate financial knowledge of the clan’s dealings.

Daniel Wildenstein created an offshore trust in the Bahamas in 1998 to lodge 2,500 works from the art dealer’s collection. A Royal Bank of Canada unit managed it, and a representative told a Paris court this week that its sole purpose was to provide funds for the family.

“There were sales in order to generate the money for making distributions to support their lifestyles,” RBC’s Brian Taylor said during the third day of the trial of Daniel’s son, Guy, and grandson, Alec Junior.

They stand accused of hiding assets worth hundreds of millions of euros to slash inheritance taxes after Daniel’s death in 2001.

The trial at Paris’ criminal court, which will last until Oct. 20, provides insight on the family’s business secrets, which were so fiercely held that Guy Wildenstein said he didn’t learn of many of the financial machinations until his father’s death.

When he transferred the works of art to the so-called Delta Trust in the Bahamas, Daniel had valued the assets at $1.1 billion. The trustee at the time didn’t second-guess that assessment, and neither did the current one, the Royal Bank of Canada Trust Co.

Art Sales
The collection held by the trust has been gradually thinned, with around 71 million euros ($79.7 million) distributed between 2001 and 2004, including more than 30 million euros in works of art, Taylor told the court. About 675 works have been sold since then, generating about $238 million for family members, he said.

A lot still remains untouched. No cash distributions have been made to the family since the end of 2013, leaving a collection worth approximately $875 million sitting in storage in the U.S., Switzerland and Singapore, Taylor said.

$1 Million
“Currently, I don’t have much left. I have to check but I’ve got less than $1 million,” said Alec Wildenstein Junior, who got $4 million in proceeds from the sale of several Pierre Bonnard works around 2013. “We haven’t received any distribution in the last few years.”


The Wildenstein family entered the art world in the 1870s in Paris when Nathan Wildenstein, Guy’s great-grandfather, helped a client sell some paintings while he was working as a tailor. Nathan opened his own gallery the same decade. His firm, Wildenstein & Co., has been family-run since then.

Five generations later, the art-dealing tradition continues through Guy, in charge of the Wildenstein Institute, whose “catalogues raisonnés” for the most important artists of the 19th and 20th centuries are so exhaustive that a work by Monet would be worthless without a so-called Wildenstein index number.

The family’s days of hoarding acquisitions may be over. While sales have proceeded, the family’s disinterest in contemporary art means no new works have been purchased for the trust since its creation.

“The contemporary art market isn’t my craft,” Guy Wildenstein said, adding that buying very expensive works “that might be worthless tomorrow” didn’t make sense to him. “I stuck to what I knew well.”

Fiscal Risks
Guy said he didn’t know there was any fiscal risk when he didn’t declare the trusts in his inheritance-tax bill, and none of his advisers and lawyers told him of any, according to the court indictment.


The assets held in trusts weren’t legally Daniel’s, his lawyers have said. Instead, they belonged to the trusts and therefore shouldn’t count for estate taxes. French prosecutors argue that the trusts aren’t truly independent, pointing to evidence that the Delta Trust became a source of bounty for Guy and his brother Alec, who died in 2008.

Unaware of the trusts when it settled in 2002, France accepted a set of bas-reliefs by Marie Antoinette’s favorite sculptor to cover an estate tax bill it believed worth no more than 17.7 million euros. It was alerted to the trust several years later as Daniel’s second wife, Sylvia, fought for her share.

Daniel’s Death
In October 2001, Daniel, who had battled cancer, fell into a coma and died. Two weeks later, Sylvia signed away her rights to her late husband’s estate. According to Sylvia, her stepsons—Guy and Alec—told her the taxes would

bankrupt her if she didn’t. Several years later, she sued Guy and Alec claiming she was cheated out of her inheritance and that the family was sitting on trusts and real estate worth billions.


Guy Wildenstein also told the Paris court he didn’t know why $188 million’s worth of paintings were moved to Switzerland from the U.S. while his father was dying. The only thing Guy said he knew was that Daniel had decided to reorganize the Delta Trust in July. Because of the complexity of moving art, items were still being shipped when he died.

The Royal Bank of Canada unit in the Bahamas didn’t learn of the shipments until more than a decade later and informed the U.S. Internal Revenue Service soon after. In total, the U.S. authorities were deprived of $136 million in estate tax due to the movements of the paintings, according to the indictment.

Guy Wildenstein hinted at one possible reason for his ignorance about Daniel’s business affairs.

“My father was a man of few words,” Guy told the court, adding that while he was head of the household, everyone else was treated like a child. “That’s how things are in the family.”

—With assistance from James Tarmy




U.S. Corporate Tax Reform Looks More Likely after Election



For all the partisan squabbling in this bizarre election year, a consensus has emerged in one important area: The U.S. corporate-tax system is broken.

No matter who wins on Nov. 8, there's surprising agreement that change is coming. To get ready, think tanks are pumping out reform proposals, tax experts are updating their research and Congress is holding hearings.

Both Hillary Clinton and Donald Trump have plans. But the one most popular among politicians and scholars is by House Speaker Paul Ryan, who is offering a type of consumption tax to fix a multitude of problems with the existing code. His plan, however, could destabilize U.S. financial markets, especially the bond market. It may also violate the U.S.'s trade commitments.

The ease with which multinational corporations avoid taxes is just one of many problems with the existing tax code. The top U.S. rate of 35 percent, the highest in the industrialized world, pushes companies to game the system. A good example is Apple's sweetheart deal with Ireland, in which Apple created "stateless income" and paid an effective tax rate of 0.005 percent.

The tax code also encourages companies to invert—merge with overseas firms and adopt their legal address—to obtain lower tax rates. Because overseas profits are taxed once they are repatriated, companies are also stashing more than $2 trillion abroad, denying the U.S. of funds that could be put to work creating jobs and spurring growth.

The current system also discourages investment by taxing corporate profits twice, once at the company level and again at the individual level as dividends. By allowing deductions for interest payments but not for dividends, the tax code favors debt over equity, sometimes resulting in dangerous levels of debt accumulation.

That's a lot of dysfunction, and the presidential candidates have ideas for ending it. Clinton often calls on corporations to pay their "fair share" of taxes, and has already decided where she'd spend a $275 billion windfall from corporate-tax reform (on a burst of infrastructure spending). But she hasn't yet said where she would set the top rate or which tax breaks she would end.

Clinton has been specific only when it comes to stopping companies from inverting: She would impose a stiff exit tax—by tapping the earnings companies have stashed overseas—in hopes they'll decide against taking a foreign address.

Trump's most recent plan would end many deductions and slash the top corporate rate to 15 percent. He would cut corporations' tax burden (and government revenue) by almost $2 trillion over a decade, by one estimate.

Ryan would lower the top rate to 20 percent and move the U.S. toward a tax on consumption with something called a destination-based cash-flow tax, developed by Alan Auerbach of the University of California at Berkeley.

Like the current system, it would tax revenue minus expenses—but would do it in a way that would give companies incentives to hire workers, invest in new equipment and keep cash at home.

For example, capital investments, such as building a new factory, could immediately be written off rather than depreciated over many years. All corporate revenue would be border-adjusted, meaning that goods and services produced in the U.S. but sold elsewhere wouldn't be taxed, as they are now. Wages would be deductible as long as the workers are in the U.S.

Interest paid on corporate debt wouldn't be deductible, thus ending the bias for bonds over equity to finance investments. (Trump would let manufacturers choose between immediate write-offs on investments or interest deductibility, but not both.)

The merits of Auerbach's proposal are many. Complicated depreciation schedules would go out the window. The ticklish matter of how to treat profits earned in foreign countries, and the gaming that worldwide taxation encourages, would disappear. Inversions would come to a halt. There would be no need for special-interest lobbying to win tax breaks. Corporate taxes would be simpler.

Domestic investment presumably would pick up because the tax code would favor exports and penalize imports. And companies that had moved production offshore would be rewarded for returning to the U.S. with lower tax bills.

Now for the demerits. Taxes on imports but not exports are usually called tariffs. By taxing only transactions in the U.S. (including imports), exports would be indirectly subsidized. And taxing foreign but not domestic labor could distort trade flows. In all cases, says the University of Southern California's Edward Kleinbard, the proposal appears to violate World Trade Organization rules, though tax and trade lawyers are vigorously debating this.

The cash-flow tax could also destabilize financial markets. The enormous U.S. bond market would be hit hard if interest payments were no longer deductible. Private-equity firms, which depend on tax breaks to subsidize heavy borrowing, could be wiped out. Banks would suffer if companies took out fewer loans in favor of issuing more stock.  

Other ideas to overhaul corporate taxes are worth considering. A bipartisan proposal just surfaced from Eric Toder, co-director of the Tax Policy Center, and Alan Viard, a resident scholar at the American Enterprise Institute. They would lower the corporate tax rate to 15 percent and tax shareholders in addition. Investors would pay ordinary income tax on gains in the market value of their shares, whether or not they sell them.

In other words, shareholder-owners would pay most corporate taxes, which sounds revolutionary but seems eminently logical. A company's tax residency and the location of its profits, which now form the basis of the U.S. system, would matter a lot less. Companies can easily shift addresses and profits across borders, but shareholders can't so easily escape taxation.

Kleinbard favors more incremental reforms that would stop inversions, lower the top rate to 25 percent—the average for developed economies—and cap interest deductions.

Everyone will have an incentive to compromise, no matter who wins on Nov. 8. Clinton has big plans to spend the proceeds from tax reform. Trump will want to prove he can govern. Ryan will want to showcase his ideas to end Washington gridlock. What better way to do this than to fix the corporate-tax mess?




India Busts IRS Scammers



Police in India have raided nine call centers in Mumbai and arrested 70 people who were calling phone numbers in the United States pretending to be Internal Revenue Service demanding payment for taxes.

A police official said that another 630 people were also under investigation in the scam after Wednesday's raid.

“They would give an American name and a batch number and tell the [US] citizen that they owed the authorities $4,000, $5,000 or $10,000,” Paramvir Singh, police commissioner in the Mumbai suburb of Thane, India, told The Guardian. “They were instructed to stay on the phone and told that their homes would be raided by police within 30 minutes if they hung up. They made threats, they said: ‘You have to pay, otherwise you will lose your job, your money, your house.’”


Victims were instructed to go to a nearby department store and buy a prepaid debt card that they would deposit the money on and then transfer it to a bank account in the U.S. The scam netted the operation approximately $150,000 a day, according to The Wall Street Journal.




IRS Filters Caught $4.1 Billion in Suspected Identity Theft Tax Fraud



The Internal Revenue Service added new data elements last tax season to its computer system filters to catch suspected cases of identity theft-related tax fraud totaling $4.1 billion, according to a new report, but it posted information about the secret data elements on its public website before removing it.

The report, from the Treasury Inspector General for Tax Administration, said the IRS tested 23 new federal tax return related data elements during the 2016 filing season in accordance with procedures in the Internal Revenue Manual.


All 23 of the data elements became part of the IRS’s Return Review Program system, although the IRS ended up using only three of the elements to systemically filter returns and help identify potential instances of identity theft tax refund fraud during the 2016 filing season.


As of March 25, 2016, the IRS identified approximately $4.1 billion in suspected identity theft tax refund fraud, of which $72 million (from 21,000 tax returns) could be attributed to the three new data elements. The IRS also attributed the prevention of 24,000 taxpayer returns from being incorrectly selected as potential identity theft tax refund fraud returns to one of the three data elements.

For the other 20 data elements, there was not enough historical data to create business rules that would allow the IRS to use them systematically during the 2016 filing season. The IRS’s Applications Development division plans to decide in future filing seasons on potentially using the data elements.

The IRS wants to keep the data elements confidential and be kept a secret from the public. TIGTA said it agrees with the IRS’s position and did not reveal them in the report to protect them from public exposure.

Nevertheless, TIGTA’s audit team did a search of the IRS’s public website and found schemas that included several of the new data elements. It notified the IRS about this finding and the IRS responded by removing the schemas containing the data elements from TIGTA also identified two other documents on the IRS’s public website containing information related to the data elements. One of the documents included specific information about one of the new data elements.

TIGTA recommended the IRS permanently remove the data elements from public access to ensure that inappropriate use cannot occur. The IRS should also do a thorough inspection of its public websites and publications to determine if other data element information is available to the public and ensure it is removed, TIGTA suggested, and the agency should put in place a secure process to provide the data elements to valid parties who have a need to access them, such as tax software developers.

The IRS agreed with one recommendation and plans to implement a secure process to provide the data elements to valid parties. The IRS partially agreed with two other recommendations and removed the schema information from its website. TIGTA maintains that data element exposure on the IRS public website and in publications increases the risk of fraud, and stands by its recommendation to remove data element information from the IRS’s public website and in publications to minimize potential misuse.

In response to the report, Debra Holland, commissioner of the IRS’s Wage and Investment Division, noted that the IRS convened a Security Summit in March 2015 with CEOs of the leading tax preparation firms, software developers, payroll and tax financial product processors and state tax administrators to discuss ways to leverage their collective resources to combat identity theft refund fraud. One of the outcomes was that software providers shared approximately 20 data elements from tax returns with the IRS and the states that could identify possible fraud. The IRS held subsequent meetings of the Security Summit last year and this year.

As a result of the Security Summit, from January to April 2016, the IRS stopped $1.1 billion in fraudulent refunds claimed by identity thieves on more than 171,000 tax returns, compared to $754 million in fraudulent refunds claimed on 141,000 returns for the same period in 2015, Holland noted. “Better data from returns and information about schemes resulted in better internal processing filters that identify fraudulent tax returns,” she noted.

She agreed that the processes and procedures used by the IRS to spot identity theft should not be made public, but she pointed out that the IRS publishes the schemas necessary for filing tax returns because software developers need to use them to develop their tax prep applications.

“New data elements, resulting from the Security Summit, were added to the schemas to assist in fraud detection,” Holland wrote. “While it was preferable to provide some form of secure access to the schemas, a workable solution could not be implemented in time for the 2016 filing season. The IRS made an informed decision to accept the business risk of making the schemas public but not to include any information about the elements in Modernized e-File publications to provide them as much protection as possible. While knowledge about the existence of data elements in the header schemas might be helpful to fraudsters, those data elements by themselves do not necessarily increase the risk of fraud. The IRS removed the schema information from in March 2016, shortly after the audit team brought their concern to our attention.”


IRS Offshore Tax Compliance Push Nets $10 Billion



The Internal Revenue Service’s efforts to prod taxpayers to disclose their offshore bank accounts and pay taxes on their holdings have reached the $10 billion mark and prompted over 100,000 taxpayers to come forward, the IRS said Friday.


The latest figures indicate 55,800 taxpayers have entered the IRS’s Offshore Voluntary Disclosure Program to resolve their tax obligations, paying more than $9.9 billion in taxes, interest and penalties since 2009. On top of that, an additional 48,000 taxpayers who have not willfully avoid paying taxes have made use of separate streamlined procedures to correct their previous omissions and meet their federal tax obligations, paying approximately $450 million in taxes, interest and penalties.


The Offshore Voluntary Disclosure Program, or OVDP, allows taxpayers who have undisclosed income from foreign financial accounts and assets the chance to catch up with their tax filings and information reporting obligations. Taxpayers can either voluntarily disclose their foreign financial accounts and assets, or else risk detection by the IRS at a later date, exposing them to more severe penalties and possible criminal prosecution.


 “The IRS has passed several major milestones in our offshore efforts, collecting a combined $10 billion with 100,000 taxpayers coming back into compliance,” said IRS Commissioner John Koskinen in a statement. “As we continue to receive more information on foreign accounts, people’s ability to avoid detection becomes harder and harder. The IRS continues to urge those people with international tax issues to come forward to meet their tax obligations.”


The IRS has developed a Streamlined Filing Compliance Procedures that is open to taxpayers who have not been willfully avoiding taxes. Taxpayers in the U.S. and in other countries have been making submissions under the streamlined program. The procedures have led to the submission of over 96,000 delinquent and amended income tax returns from 48,000 taxpayers using these procedures. A separate process exists for taxpayers who have paid their income taxes but not filed certain other information returns, such as the Report of Foreign Bank and Financial Accounts, also known as the FBAR.


The IRS recently revised the certification forms used for the streamlined procedures. The most current versions of Forms 14653 and 14654 are available on In addition, some of the most commonly used phone numbersfor the Offshore Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures have changed.


The IRS’s series of Offshore Voluntary Disclosure Programs are not the only factor prompting taxpayers to disclose their foreign bank accounts. In 2010, Congress passed the Foreign Account Tax Compliance Act, or FATCA, as part of the HIRE Act. The legislation requires foreign financial institutions to report on the holdings of U.S. customers or else face stiff penalties of up to 30 percent on their income from U.S. sources. To implement the controversial legislation, the Treasury Department signed a series of intergovernmental agreements with the tax authorities in other countries, under most of which the information is first given to the local tax authority, which in turn passes it along to the IRS.


This form of automatic third-party account reporting has now entered its second year and is convincing more taxpayers to voluntarily disclose their holdings before their bank provides it to the tax authorities. More information also continues to come to the IRS as a result of the Justice Department’s Swiss Bank Program, the IRS noted. As part of a series of non-prosecution agreements with banks such as UBS, the participating banks continue to offer information on potential non-compliance by U.S. taxpayers.




Anticipating Your Clients' Questions about the New Overtime Rule



The Department of Labor released the highly anticipated final overtime rule in May, expanding overtime pay eligibility to approximately 4.2 million salaried workers across the country.


Despite recent news that a lawsuit has been filed by 21 states as well as a separate lawsuit filed by business groups led by the U.S. Chamber of Commerce both challenging the rule, businesses are urged to continue with preparation efforts for the Dec. 1, 2016 effective date.


Despite the fact that the updates are expected to have a significant impact on businesses, a recent Paychex Small Business Snapshot showed that nearly half of all business owners (49 percent) claimed they were unaware of the final overtime rule altogether. Additionally, of those who were aware, 67 percent said it will have little or no impact on their business, perhaps underscoring a lack of knowledge about the potential implications of the rule.


By being knowledgeable about the new regulations, accountants can advise their clients accordingly. Employers should be familiar with the rule and understand how it might affect their businesses and employees. Below are answers to some common questions to help business owners prepare.


Overtime Rule FAQs
1. Does the exempt rule affect small businesses?

Small businesses are not exempt from the new rule. However, the Fair Labor Standards Act and its provisions apply to employees of enterprises that have an annual gross volume of sales or business of $500,000 or more.


2. Is the threshold based on the salary alone, or does the cost of benefits contribute to the amount?

Benefits—with the potential exception of some percentage of bonuses—are not included in the salary thresholds of the current regulations or the new regulations. 


3. How are businesses handling this transition?

Of the estimated 4.2 million salaried workers that will be entitled to overtime pay, the DOL estimates businesses will respond by either converting their employees to overtime-eligible status or raising their employees’ salaries above the new threshold. It is expected that the majority (4.1 million) will convert their employees to overtime-eligible status.


4. If the pay period is bi-monthly, how is overtime pay calculated when the start date or end date is in the middle of a regular work week?

Overtime must always be calculated based on the hours worked in the workweek, not the pay period. They cannot be averaged over more than one workweek.


Preparation is Critical

Business owners with employees who may be affected should take the initiative now to evaluate their company’s standing, examine how different scenarios will impact their bottom line, and determine how to move forward in order to avoid wage claims and other issues.


Once a client understands the new regulations and how they may impact their business, conducting an audit of which current employees are likely to be affected is recommended. This can be done in partnership with a payroll provider or compensation specialist.


A good next step is to examine historical overtime payments and determine whether costs are likely to increase due to hours worked. By looking at the impact of the new rules on the financial picture, clients will be in a better position to the take the actions most appropriate for their companies.


Don’t underestimate the power of technology. Back pay—as well as penalties and fines—can be very expensive, even when it's an unintended mistake. It's possible to enable workers to enter time via kiosks, mobile devices, and more.


With limited lead time to comply with the new overtime rules, business clients should start planning now. A strategic plan to make the necessary changes will help them avoid potential chaos in business operations.


Mike Trabold is director of compliance risk for Paychex, Inc., a leading provider of human capital management solutions for small- to medium-sized businesses.




The Rich Get Ready for Higher Taxes Under a President Clinton



For wealthy Americans, a big win by Hillary Clinton on Nov. 8 could get pretty expensive.


Clinton is proposing higher taxes on Americans who make more than $250,000, including a 4 percent “fair share surcharge” on incomes over $5 million a year. She’s also trying to limit the ability of the rich to lower their tax bills through clever planning. 


This has made the election a hot topic at accounting and advisory firms that cater to the wealthy. The election “dominates the conversations we have with clients today,” said Brian Andrew, chief investment officer at Johnson Financial Group.


Changing tax laws is easier said than done. Even if the Democratic presidential candidate defeats Donald Trump, she’ll probably be negotiating any tax bills with a House of Representatives still controlled by Republicans. Democrats would get free rein to set tax policy only if a big Clinton win helps them gain control of both the Senate, which is teetering, and the House. The likeliest scenario is divided government, in which the House will thwart any substantial tax increase, said Joe Heider, founder of Cirrus Wealth Management in Cleveland.


Still, “there’s a growing concern [among Republicans] that this could become a wave election,” Heider said.

Clinton proposes raising revenue by $1.4 trillion over the next decade. Almost all of that burden would fall on the top 1 percent of taxpayers, according to the Tax Policy Center. The top 1 percent's after-tax income would fall by an average of 7 percent. Trump, by contrast, would cut taxes by $6.2 trillion over the next 10 years, with the top 1 percent getting almost half that benefit and a 13.5 percent boost to their after-tax income.


Advisers to the wealthy are ready to take evasive action if Democrats make big gains.


“We have to be quick enough to pull the trigger after Nov. 8,” said Alan Kufeld, a CPA and tax partner at Top 100 Firm PKF O’Connor Davies LLP, who says most of his clients have a net worth of $25 million to $1 billion. “You have to have a plan that is very fluid.”




The rich tend to have more financial flexibility than other taxpayers. If taxes look like they’re going up, they have a few cards they can play. One common tactic is being smart about when to receive income and when to recognize losses and take deductions. To cut the taxes you owe next April 15, for example, you can try delaying income to future years while taking as many deductions and losses as you can this year.


“If you’re going to sell something, sell it next year so you have an extra year to pay the tax,” said Richard Rampell, a CPA and principal at Top 100 Firm MBAF in Palm Beach, Florida.


But a big win by Democrats could turn that conventional strategy on its head, Rampell said. Instead of trying to minimize this year’s tax bill, you might try to take as much income as possible in 2016 – for example, by selling a winning stock – rather than risk paying higher taxes on that money in 2017 or 2018.


There's a huge question mark hanging over all these tax matters. When would any tax increase be implemented? Ordinarily, a tax bill passed in 2017 would go into effect in 2018, giving the wealthy plenty of time to prepare. The biggest fear is a tax increase passed in 2017 that's retroactive to the beginning of the year, said Michael Kassab, chief investment officer at Calamos Wealth Management.


It’s happened before. In 1993, a tax bill passed at the beginning of Bill Clinton’s administration affected earnings that same year. If it happens again, the wealthy may have only the last several weeks of 2016 to get ready for higher taxes.

“There really is no way to know,” said Brittney Saks, a partner at Big Four firm PwC based in Chicago. “It’s that uncertainty that’s making people uncomfortable.”


If Clinton gets her plan through, taxes would get both more complicated and harder to avoid. She has proposed new rates on capital gains, so that taxpayers pay higher rates if they hold an investment for less than six years. She’d also give people less flexibility to lower their tax bills with common strategies. For example, she would limit the ability of the wealthy to itemize deductions, with the exception of charitable deductions. She'd also require a minimum effective tax rate of 30 percent on incomes over $1 million — the Buffett Rule, named after billionaire investor Warren Buffett, a Clinton supporter, who declared it isn't right that his secretary should pay a higher tax rate than he does. 


Municipal bonds should remain a tried-and-true method for wealthy investors to lower their tax burden. While munis tend to yield less than other bonds, their income generally isn’t taxed. If capital gains tax rates go up, Heider said, investors might also think about investments they can buy and hold for longer periods of time, such as real estate.




There’s good reason to wait and see what actually passes Congress.


“Even if Hillary Clinton is elected president, and even if there is a Democratic Congress, it’s not so easy to change the tax laws,” said Paul Ambrose Jr., a law partner at Cullen & Dykman LLP in Hackensack, N.J., who specializes in estate tax planning. It might not be easy to get lawmakers, worried about their own political futures, to go along with a tax increase.


And not every wealthy person would be affected by a tax hike.


“Just because tax rates may go up next year, it doesn’t mean your tax rate is going up,” said Tim Steffen, director of financial planning at Baird. For example, Clinton’s proposals largely spare high-earning professionals if they have few taxable investments and few deductions.


So while advisers are vigilant, they’re warning clients not to make any big moves until the political future is clearer. Most of all, they say, people shouldn’t let worries about taxes override sound strategies.


“Basic economics should always drive decisions,” Heider said. “Tax benefits, or tax avoidance, should always be secondary.”




IRS Hopes to Collect Billions in Taxes from Nonfilers



The Internal Revenue Service plans to make changes in how it deals with people who don’t file tax returns to collect billions of dollars in lost tax revenue, according to a new report.


The report, from the Treasury Inspector General for Tax Administration, said the IRS has a strategy in place as part of its Case Creation Nonfiler Identification Process to identify taxpayers who have not filed a tax return and are required to do so if their income is above a certain threshold. The IRS typically issues delinquency notices to more than 640,000 nonfilers each year whose tax extensions have expired.


While it is mostly an automated process, the IRS failed to identify and address approximately 1.9 million nonfilers with expired extensions in tax years 2012 and 2013. As of May of this year, those taxpayers still owed an estimated $7.4 billion.


Most nonfilers with expired extensions were not identified or addressed in tax year 2012 because of a programming error the IRS did not completely investigate or fix in a timely way. In tax year 2013, IRS management canceled this process for all taxpayers with expired extensions. The nonfiler process runs on a standalone basis each tax year, so the majority of nonfilers with expired extensions in tax years 2012 and 2013 will probably never be notified of their obligation and failure to file a tax return.

The IRS has identified high-income nonfilers as a high compliance risk and one of the agency’s top eight high-priority areas in its annual work plan, yet none of the high-income nonfilers with expired extensions were notified of their delinquency in tax years 2012 or 2013.


In February 2014, the IRS changed its nonfiler strategy and goals in an effort to increase compliance. However, as of July 2016, the IRS has still not implemented any of the nonfiler initiatives it has proposed. On top of that, the nonfiler strategy did not describe any specific actions to improve the compliance rate, including how to reach more of the nonfilers the IRS identifies each year and determining the effectiveness of the return delinquency notice in an effort to increase the response rate.


“With effective program management controls, the IRS can identify and address delinquent individual taxpayers with expired extensions of time to file,” said TIGTA Inspector General J. Russell George in a statement. “This is essential for the high compliance risk area of nonfiling.”


TIGTA recommended the IRS change various collection function and information technology controls, tools and procedures to improve its nonfiler program and ensure it addresses more nonfilers. In response to the report, the IRS agreed with TIGTA’s recommendations and plans to take action.


“We will use your findings and recommendations, coupled with data analytics research that we plan to undertake, to help refine our Nonfiler Program strategy, with a dual goal of prioritizing as much of this work as our resources will allow and also developing a process for selecting productive nonfiler cases,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division. “To find efficiencies, we will investigate the options for improving the effectiveness of the delinquency notice to increase the number of nonfilers who are contacted and the nonfiler response rate. As part of that process, we will collaborate with our Information Technology function to expand its review of the inventory volu




Group Complains to IRS of High Information Reporting Costs



A new report from an Internal Revenue Service advisory group points to the high costs of information reporting and how the IRS can reduce the burden.


The report, from the IRS’s Information Reporting Program Advisory Committee, describes some of the challenges in information reporting, and how the IRS’s perpetually constrained budget often keeps the agency from acting on the recommendations from the committee’s annual reports.


“In many instances, we have been told that the IRS cannot pursue our recommendations because the IRS lacks the resources to open additional projects,” said the report. “As a result, both taxpayers and the IRS suffer.”


However, the IRPAC report notes that information reporting requirements have continued to rise in recent years, thanks to legislation from Congress. “An ongoing wave of new information reports shifts new and substantial burdens to payors and financial intermediaries,” said the report. “In just the last 6 years, Congress has added information reporting for cost basis on securities sales, reporting of financial payments under the Foreign Account Tax Compliance Act (FATCA) and health care coverage and enrollment under the Affordable Care Act (ACA).”


The Financial Institute Forum estimated the cost to brokers and other financial intermediaries for implementing cost basis reporting was more than $500 million for the initial reporting period of 2011 to 2013, the report pointed out.


The report describes a number of small changes the IRS can make, for example, in the area of 972CG penalty abatement requests, and the IRS process for evaluating reasonable cause waivers for payors. The IRS assesses the penalties when information returns have been submitted with errors in the name or Taxpayer Identification Number or the returns were filed late.


“Payors may seek abatement of the penalty if they can show they acted in a reasonable manner and the errors were not caused due to willful neglect,” wrote IRPAC chairperson Michael Gangwer. “Our report details the pain that payors experience in obtaining this waiver and recommends that the IRS take appropriate steps to address a serious issue that we believe will lead to a reduced burden on payors and IRS personnel alike and allow valuable resources to be better allocated.”


The report also makes recommendations on alleviating some of the reporting requirements under FATCA and the ACA, along with electronic delivery of Forms W-2 and 1095-C, identity theft and other topics.
“Effective information reporting results in effective tax administration,” said IRS Commissioner John Koskinen in a statement. “The committee’s recommendations are an important line of sight into how we can improve the IRS information reporting program.”




Trump's Broad Businesses Pose Conflict Tests, Specialists Say



The federal tax audit that emerged as an issue in Donald Trump’s campaign would turn into another problem altogether if the Republican nominee wins the election—and gains the power to pick the next Internal Revenue Service chief.


“He would be on both sides of the issue,” said Sheldon Cohen, the IRS commissioner in President Lyndon Johnson’s administration. “Of course, you’ve got to be concerned about it.”


The potential conflict of interest with the IRS is one example of the governance challenges posed by the billionaire’s broad business interests. Trump trailed Democrat Hillary Clinton by 9 percentage points in the latest Bloomberg Politics national poll, and he’d need a historic comeback to win. But should he pull it off, he might face an even thornier challenge: convincing the public he can make policy decisions without regard for how they’d affect his fortune.


The nature of those interests—more than 500 partnerships and closely-held companies that own and manage signature real-estate holdings and license Trump’s brand—makes it difficult for him to separate himself from his businesses, according to three business-ethics specialists. A President Trump would face an unprecedented array of potential conflicts—from federally regulated lenders that have advanced him an estimated $630 million to foreign governments that have influence over his golf resorts and other developments.


“In terms of conflict of interest, there’s really nothing comparable,” said Kenneth Gross, who leads the political law practice at Skadden Arps Slate Meagher & Flom LLP and is a former lawyer for the Federal Election Commission.


Neither Trump’s campaign nor the Trump Organization, which houses his business operations, responded to e-mails seeking comment.


Clinton has faced her own conflict-of-interest questions, focused mostly on the Clinton Foundation, the $2 billion charity that her husband, Bill Clinton, founded. The Associated Press reported this year that as secretary of state, Hillary Clinton met with at least 85 people who had donated to the foundation or pledged commitments to its programs.


The foundation announced in August that if Clinton wins, it will stop taking money from any foreign or corporate donors. Bill Clinton has said he’d resign from the foundation’s board. September marked the end of the Clinton Global Initiative, an annual gathering of politicians, business leaders and others to discuss solutions to global problems.


Sever Connections

Richard Painter, a corporate law professor at the University of Minnesota and a former White House chief ethics officer for President George H.W. Bush, said that to avoid conflicts, the Clintons need to sever their connections to the foundation. That includes having daughter Chelsea Clinton, the charity’s vice chairman, step down from the board, he said.


A Clinton campaign spokesman referred a reporter to the foundation’s previous statements about the changes.


It’s not unusual for candidates with extensive business interests to seek the White House, but typically their holdings are better suited for management by an independent trustee. For instance, Mitt Romney, a founder of private-equity firm Bain Capital who was the 2012 Republican presidential nominee, said that year that if elected, he’d put his estimated $250 million portfolio into a blind trust overseen by federal officials.


Lyndon Johnson was the first president to place his assets in a blind trust. His was set up by Cohen, whom Johnson later named to head the IRS in December 1964.


Trump has said he’d avoid conflicts by turning over the management of his businesses to his children, Ivanka, Donald Jr. and Eric. “I would put it in a blind trust,” he said during a Republican primary debate in January. “Well, I don’t know if it’s a blind trust if Ivanka, Don and Eric run it, but—is that a blind trust?”


It’s not. Blind trusts are overseen by independent trustees, Gross said. Last month, the Trump Organization announced a new brand for future hotels and resorts: “Scion.” But even if Trump left management and even with a new brand that’s not his last name, he wouldn’t truly be separated from his companies’ interests, Gross said. He’d still know where his business interests are placed around the world, including Turkey, South Korea, India, Azerbaijan and elsewhere.


Then there’s the IRS audit, which Trump’s tax lawyers confirmed in a March letter. Trump has cited the audit as his reason for not releasing any tax returns—something major-party presidential nominees have done for roughly 40 years. (There’s no rule preventing people from releasing returns even if they’re under audit. But tax specialists advise against it, saying the public might find items that auditors missed.)


IRS Questions

IRS Commissioner John Koskinen told members of Congress last month that he’d resign immediately if the next president asks him to, but his term is up in November 2017 regardless. It’s impossible to know whether the tax agency would still be auditing Trump by then; only Trump himself could release that information. IRS officials are barred from discussing individuals’ tax returns.


Questions would also remain about Trump’s transactions with lenders that are subject to federal regulation, said Painter, of the University of Minnesota. One such question: “whether he’s going to kowtow to the banks, because the banks are extending him credit,” Painter said.


On a May 2016 disclosure, Trump reported loans from 16 lenders, including units of Bank of New York Mellon Corp., Bank of America Corp. and UBS Group AG. Among his borrowings is a $170 million line of credit from a unit of Deutsche Bank AG that funded renovation work at the new Trump International Hotel in Washington. Deutsche Bank is negotiating with the U.S. Justice Department to settle a mortgage-securities investigation that may be resolved only after the election. News organizations reported last month that the government had asked for $14 billion, a figure the bank has said it won’t pay. As president, Trump would nominate a new U.S. attorney general to oversee the Justice Department.


Certain presidential appointees, including cabinet heads, require confirmation from the U.S. Senate, which provides a check on the White House’s authority.


But federal law provides only muted guidance for presidents. While criminal conflict-of-interest rules generally ban officials’ using their positions to further their personal interests, those rules exempt the president and vice president. (White House leaders “should conduct themselves as if they were so bound” by the rules, according to a 1983 Office of Government Ethics letter.) The president is also exempt from rules governing how members of Congress and other officials interact with lobbyists, trade groups and other interests.


“He’s off the hook when it comes to the requirements that regulate Congress—it gives him a very wide berth,” Gross said.


The U.S. Constitution prohibits officeholders from receiving compensation from a foreign government or related entity. But Gross said that wouldn’t apply to, say, Trump urging official visitors to stay at his new hotel on Pennsylvania Avenue, five blocks from the White House.


In the absence of legal restrictions, it would be up to a President Trump to ensure his decisions weren’t affected by his businesses’ aims—or face political backlash.


“All you really have is the power of public opinion, and maybe the power of a Congress alarmed by actions by a president that fit his or her economic interests,” said Norman Ornstein, a scholar and political expert at the American Enterprise Institute, a conservative policy group in Washington.




Prepping for Post-Election Tax Reform



No matter who wins this year’s presidential election, CFOs and tax directors alike will wonder what changes are looming. Given the slim chance of a complete overhaul of our tax system, the short answer to our titular question is, “Probably not much.”


Is Tax Reform Likely?

The likelihood of either candidate successfully implementing tax reform as president without congressional alignment is quite small. The 435 representatives and 34 senators up for re-election this year also have a role to play in passing tax reform—and both parties have their own views on the right approach. Without compromise between Congress and the president, the Commander in Chief has limited power in this arena.


Until we’re closer to November 8, it’s going to be difficult to predict which party will hold majority power in Congress, limiting our ability to predict if there will be a blend of legislators who could assist in enacting a major legislative change.


Operating in Times of Uncertainty

Policy points aside, election years always entail some uncertainty, which makes year-end tax planning all the more important. Some CFOs or tax directors may be reticent to make concrete, proactive plans in the face of such unpredictability.


In actuality, a business’s 2016 taxes are going to be what they are regardless of the election outcomes, and being proactive sets you up for success in the long run. Most tax directors and CFOs have spent their entire careers operating in vague climates—in fact, many continued to pursue R&D activities under the assumption that the credit would be extended each year, even before Congress passed the PATH Act. So, in many ways, the tax environment should remain business as usual.


Tax Regulations beyond Total Reform  

Rather than focus on future legislative proposals that may or may not come to fruition, companies should pay close attention to regulatory changes already in motion. For example, the Treasury Department has issued some significant guidance over the past year that could impact multinationals; most notably, temporary regulations aimed at curbing so-called inversion transactions, which have stopped some high-profile mergers—such as the Pfizer-Allergan deal—in their tracks.


The IRS has also published updated guidance surrounding IRC Section 385 that could cause some related-party debt transactions to be reclassified as equity, and requires additional documentation for entities making intercompany loans. These types of changes can lead to higher tax bills and, as a result, require careful preparation and attention now. Companies should not wait to see how a new administration may or may not change the rules that are already in process.


Meanwhile, the United States’ participation in the Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting initiative, also known as OECD BEPS, will continue regardless of who our next president may be, with significant implications for multinationals. More important than the president’s policy proposals will be who he or she will choose to head up the Treasury and IRS. These individuals will be leading the BEPS charge from the U.S. side, and understanding their priorities will be essential for U.S. businesses looking to stay ahead of the curve on this issue.


But perhaps most immediately, businesses should be keeping a close eye on state and local tax reform efforts. With many companies incurring the majority of their tax burden at the state and local level, and with state and local legislation often moving at a faster pace than federal initiatives, changes to state and local taxes may be just as important, if not more important, than any hypothetical federal tax reform. For example, this November, Oregonians will vote on Measure 97, a proposed gross-receipts tax on large corporations that would place a 2.5 percent tax on corporate sales exceeding $25 million.


States and municipalities throughout the country are exploring such potential tax changes, including both ordinary changes (sales tax increases) and new initiatives (such as soda taxes), and these efforts often move independent of any election cycle. Savvy businesses monitor these developments year-round, and build them into their tax planning to avoid any unpleasant surprises regardless of what’s happening at the national level.


November 9 and Beyond 

In the end, it’s important to look at the entire picture of election season—not just the sensationalized presidential race. This year’s presidential election is unlikely to yield major economic or business changes in the short term, and it’s questionable whether we’ll see meaningful changes—from a tax perspective, at least—in the medium term, either. A CFO’s best bet is to avoid the distraction of a contentious presidential contest, and instead identify the immediate and tangible opportunities and threats poised to affect his or her business.


Matt Becker is central managing partner of BDO USA’s Grand Rapids office, and Paul Heiselmann is national managing partner of specialized tax services at BDO USA's headquarters in Chicago




On Their Own: Advising the Self-Employed



Clients in business for themselves face a host of challenges. How can you best advise clients who already have their hands full making a living on their own?


“We’ve always promoted that a self-employed person needs a retirement plan,” said CPA Timothy Oatney in Lancaster, Ohio. “This can be an IRA (regular or Roth), a Simple plan or an SEP (usually recommended when a client comes in for the first time after Dec. 31.”


“We advise self-employed clients regarding the tax savings of retirement accounts,” said Philip Garofalo, an Enrolled Agent at Preferred Financial Services, in Mays Landing, N.J. “We explain to them that retirement savings should only be considered when the business has expendable profits after paying all employees, vendors and all required taxes.”


 “My advice to self-employed and 1099 people is the same as to most anyone: save as much as possible without imposing draconian restrictions,” said Morris Armstrong of Armstrong Financial Strategies in Danbury, Conn. “Depending on earnings, they have the ability to save through Simple IRAs, solo-401(k)s, defined benefit and the SEP. They also need to balance the writing off of expenses versus the contribution to Social Security – the tax that also goes toward their retirement.”


“Being self-employed takes commitment, planning and discipline,” added Georgianna Adkins, an EA at Adkins Bookkeeping & Tax, in Van Wert, Ohio. “You are in charge and have no one but yourself to blame when things go south. They need to pay themselves first, because nobody else will do it for them.”


“Start early and start small,” advised EA Kerry Freeman of Freeman Income Tax Service, Anthem, Ariz. “Retirement is a lifetime event and you should build the habits of saving even [in] a small amount. The habit makes the money grow.”


Down-to-earth examples


The self-employed seem to respond well to advice rooted in examples they can quickly understand. “For instance, if you run a beauty salon, the first haircut of the week goes into an account for your retirement or, if you’re in auto repair, the first oil change each week,” Adkins said.


“If nothing else, set up an IRA and start putting money into it,” said Eva Rosenberg, an EA and founder of the blog TaxMama ( “Regardless of how small your contributions are in the beginning, they will grow. You can always increase them along the way. Saving as little as $50 a month for 40 years can be worth as much as $320,000 on the $24,000 investment.”


“We remind the clients they are not getting younger and that Social Security will only replace a small piece of the retirement pie,” said Delmar Gillette of Coastal Tax in Newport News, Va. “We move into a discussion of what type of retirement plan is best afforded by the business, including any contributions for employees, paperwork required by the plan and other time-consuming issues of the plan.”


Jim Loperfido of JGL Management Consulting in Auburn, N.Y., has “a wooden-nickel rule. I try to convince them to save 5 percent each day. In other words, get someone else to pay for their retirement. For instance, if a piece of equipment costs $100, find a way to get it for $95.”


“I inform them of the tax benefits of opening a traditional IRA or funding a Keogh, or the tax benefits of [a Roth] IRA down the road when the money is withdrawn,” said Stephen Anderson, an EA in Carlsbad, Calif. “For an IRA, Keogh or SEP IRA, I can tell them how much of a tax savings they are or aren't getting. For instance, if they contribute X, the tax benefit is Y. Then I give them a percentage. For example, if they contribute $1,000 to a traditional IRA and their total federal and state refunds are going to increase $300, they get 30 percent, or 30 cents on the dollar, of tax benefit.”


“I always ask about retirement plans at tax time and encourage them to go to their local bank and ask about a SEP or IRA,” said Sue Henderson of Bristol Tax and Accounting, Bristol, Tenn. “I remind them that saving for retirement can also reduce their tax liability.”


“Open an IRA with your bank of choice (often easiest to open at the bank where your business transactional accounts are held) and put the current annual limit into the account,” said Darcy Alvarez, a preparer with Liberty Tax in Southern California. “For younger entrepreneurs, I often encourage them by going over the benefits of retirement savings come tax time next year.”


Varied retirement vehicles


“Once they have their payment plan in place for self-employment taxes, they can start planning for retirement,” said Becky Neilson of Neilson Bookkeeping, in Sheridan, Calif. “If nothing else, start a traditional IRA or Roth IRA. Set up a monthly amount to put in an IRA and stick to it.


The self-employed have more retirement tools available than most of them realize. Jeffrey Schneider, an EA in Port St. Lucie, Fla., often recommends SEP-IRAs. “One can give more than 20 percent of their net and there is no cost, as opposed to Keogh plans. There are also plans where you can do a 401(k) or pension plan.”


“My retirement plan of choice is usually the SEP,” said Stephen DeFilippis, an EA at the DeFilippis Financial Group in Wheaton, Ill. “It allows the self-employed individual to contribute a substantial amount and gives them some latitude to exclude employees if they have them. I also look at Simple plans, solo 401(k)s, money purchase and profit sharing plans and IRAs.”


“For single-owner businesses without employees, I always encourage the [solo] 401(k),” said Debra James, an EA at Genesis Accounting & Management Services, in Lorain, Ohio. “If they have employees, I also talk about a regular 401(k) plan if their goal is to save as much as possible for themselves. If they want to find a happy medium, we talk frequently about Simple plans since they are inexpensive to maintain compared with the 401(k), and they and their employees can defer a significant amount of income.”


The preferred plan if the business has no employees is the solo 401(k), Ohio’s Oatney said, “since it is out of reach in lawsuits, and, as a self-employed person knows all too well, when business is slow an infusion of capital might be needed. With this plan, a loan can be made to themselves that can assist in cash flow but will be paid back to their own retirement.”


“If it’s a new business,” Neilson added, “they may not be ready for the 401(k) or SEP programs due to lack of funds. I usually also suggest they consult a financial advisor regarding 401(k)s to make sure they follow the law.”