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Should a Taxpayer be Liable for Tax on Income She Didn’t Receive?

By  Russ Fox, E.A., of Clayton Financial and Tax of Las Vegas, Nevada


Not even the IRS could go after someone for income they didn’t receive, right? Well, wrong. And when the taxpayer filed a lawsuit to reverse the result, she lost. She appealed to the Eleventh Circuit where the Court had a slightly different view of taxes than the government.


The story begins when her ex-husband is subject of a lawsuit (they were married at the time). It became clear the lawsuit would last longer than the marriage, and the couple agreed that they’d be equally liable for the judgment (if any). The couple divorced; later, the ex-husband settled the lawsuit for $600,000. He paid that to the plaintiff; he also filed a claim on his tax return for the $300,000 he paid. The IRS had no problem with that.


Per the divorce agreement, she reimbursed him $300,000. She also took a deduction under Section 1341 of the Internal Revenue Code. The IRS said no you don’t. She asked for relief in court. The district court granted summary judgment to the IRS. She appealed.


The Appellate Court looked at what’s necessary for relief: To obtain relief under § 1341, a taxpayer must satisfy four requirements.


First, an item of income must have been included in a prior year’s gross income “because it appeared that the taxpayer had an unrestricted right to such item.” § 1341 (a)(1). Second, the taxpayer must have later learned that she actually “did not have an unrestricted right” to that income. See § 1341(a)(2). Third and fourth, the amount the taxpayer did not have an unrestricted right to must have exceeded $3,000 and be deductible under another provision of the tax code. Fla. Progress, 348 F.3d at 957, 959. If the taxpayer can demonstrate these elements, then she has a choice between two options: “[s]he can deduct the item from the current year’s taxes, or [s]he can claim a tax credit for the amount [her] tax was increased in the prior year by including that item.”


The government disputed whether the taxpayer had an unrestricted right to the income. The lawsuit claimed that there was misappropriation of funds. “But here, the record lacks any proof that [the ex-husband] knowingly misappropriated income, since his settlement agreement with [B] expressly disclaimed any wrongdoing.” The government also claimed that she had no presumptive right to the ex-husband’s income. “First, even if the government’s assertion were correct, it makes no difference to the § 1341 analysis. What matters is whether [she] sincerely believed she had a right to [his] income, not the correctness of her belief.”


The next part of Section 1341 is for the taxpayer to establish that “after the close of a taxable year, ‘the taxpayer did not have an unrestricted right’ to some amount she initially reported as taxable income. To make this showing, the taxpayer must demonstrate that she involuntarily gave away the relevant income because of some obligation, and the obligation had a substantive nexus to the original receipt of the income.” The government said that she voluntarily gave away the income. The Court disagreed.


[Her] situation is materially indistinguishable. As with Barrett, her obligation to pay arose not from a final judgment, but from an agreement she entered in good-faith to avoid litigation. And it would be equally as “ludicrous”—as it was in Barrett to say that Barrett voluntarily paid his $54,000—to conclude that [she] voluntarily paid $300,000 of her income without regard to any legal obligation.


Indeed, she initially opposed paying [her ex-husband] for any liability arising from the…lawsuit. Only after [the plaintiff in the lawsuit] threatened her with litigation did she agree to be bound to do so and enter into Article 5 of her separation agreement…


[She] also paid an attorney to advise her of her rights, and that attorney told her that she had an “obligation” to pay [the plaintiff]. Under these circumstances—and particularly in light of the desirability of fostering settlements without litigation—[she] did not need to wait to be sued before settling and paying for her payment to be considered involuntary. Because the record reflects [she] reasonably anticipated litigation and settled in good faith in the shadow of litigation, her $300,000 payment was involuntary for purposes of § 1341.


The Court also noted that the obligation to pay must relate to the original receipt of income, and that she clearly established that.


There’s one more element that must be met:


Finally, to qualify for § 1341 relief, Mihelick must show that her $300,000 payment is deductible under another provision of the tax code. Fla. Progress, 348 F.3d at 958-59. Mihelick can meet this element, as she can deduct her payment under 26 U.S.C. § 165(c)(1), which allows deductions for an individual’s uncompensated “losses incurred in a trade or business” during the taxable year.


Given that the ex-husband was the CEO and majority shareholder, and that the lawsuit alleged that he breached his fiduciary duty while acting as CEO, the lawsuit related to the income and can be deducted.


The Court began the decision as follows:


Inscribed above the main entrance of the Internal Revenue Service office in Washington, D.C., is a quotation from Supreme Court Justice Oliver Wendell Holmes Jr.: “Taxes are what we pay for a civilized society.”…An admirable outlook, yet even Justice Holmes would likely agree that it is uncivilized to impose taxes on citizens for income they did not ultimately receive. But that is precisely the result the government asks us to uphold today. [citation omitted]


The Court rightly chastised the IRS and US government for being uncivilized.

Case: Mihelick v. United States




Jolly Good News on the Swart Front

By  Russ Fox, E.A., of Clayton Financial and Tax of Las Vegas, Nevada


Let’s say you’re the managing member of an LLC headquartered in Seattle (duly registered as an LLC in Washington State). You invest in another LLC (a Delaware LLC) that invests in property throughout the United States. You own between one and five percent of the Delaware LLC each year, and are not involved in any of the decisions of the Delaware LLC. The Delaware LLC invests in California property, and is considered doing business in California (it registers with the California Secretary of State and files a California LLC tax return). Is your Washington State LLC doing business in California?


The California Franchise Tax Board has been holding for years that if you invest in a California LLC–or a foreign LLC doing business in California–your LLC is considered doing business in California. Even an indirect investment (investing in LLC 1 that invests in LLC 2 that invests in a California LLC) is enough to be doing business in California in the view of the FTB. Then came Swart.


As previously discussed on this blog, Swart Enterprises, Inc challenged the FTB regarding its 0.2% interest in a manager-member California LLC. The courts held that such a passive investment is not doing business in California. After Swart, the FTB held that if your passive interest is 0.2% (or less), you’re not doing business in California; greater than that, you are.


Jali, LLC is a Washington State LLC that mirrors the fact pattern in the first paragraph. They invested in Bullseye Capital Real Property Opportunity Fund, LLC and California’s Franchise Tax Board asserted they were doing business in California. Jali, LLC paid the FTB for the years in question and filed a claim for refund; the claim was denied because Jali, LLC owned more than 0.2% of Bullseye. Jali, LLC appealed to the California Board of Tax Appeals.


In what will be a precedential decisionthe Board of Tax Appeals noted:


FTB thus takes the position that a 0.2 percent membership interest in an LLC doing business in California is the new, post-Swart bright-line ownership threshold used to determine whether an out-of-state member is also doing business in the state. As applied to the facts of this appeal, FTB concludes that appellant is deemed to be “actively” doing business in California because its membership interest in Bullseye “was well beyond the 0.2% Swart limit.” We disagree.


FTB misconstrues the Swart court’s statement, “We conclude Swart was not doing business in California based solely on its minority ownership interest in Cypress LLC.” The court’s opinion was not “based solely” on Swart’s minority ownership interest. Rather, in making this statement, the court was simply dismissing FTB’s argument that the court should base its decision on that fact alone. When the entire opinion is considered, it becomes abundantly clear the court’s holding was squarely grounded on the relationship between the out-of-state member and the in-state LLC.


But that’s not all. The Board of Tax Appeals realizes that the key questions are, (a) Is the entity a limited or general partner, and (b) Can the limited partner control the activity of the LLC that is doing business in California?


FTB misconstrues the Swart court’s statement, “We conclude Swart was not doing business in California based solely on its minority ownership interest in Cypress LLC.” The court’s opinion was not “based solely” on Swart’s minority ownership interest. Rather, in making this statement, the court was simply dismissing FTB’s argument that the court should base its decision on that fact alone. When the entire opinion is considered, it becomes abundantly clear the court’s holding was squarely grounded on the relationship between the out-of-state member and the in-state LLC…Indeed, in rejecting the same argument FTB advanced there as it does here, the court concluded that “[b]ecause the business activities of a partnership cannot be attributed to limited partners, Swart cannot be deemed to be ‘doing business’ in California solely by virtue of its ownership interest in Cypress LLC.” (Ibid., emphasis added and internal citation omitted.) Accordingly, Swart did not establish a bright-line 0.2 percent ownership threshold for purposes of making nexus determinations for out-of-state members holding interests in in-state LLCs classified as partnerships.


Employing the foregoing legal analysis from Swart, we agree with appellant that it is not subject to California tax. Appellant points to certain relevant facts—none of which FTB contests—that are virtually identical to those in Swart. Under its operating agreement, (1) Bullseye is a manager-managed LLC, (2) it is managed by an elected director(s), not appellant, (3) appellant is not personally liable for any debt, obligation, or liability of Bullseye, (4) appellant has no power to participate in Bullseye’s management, or bind or act on behalf of it in any way, and (5) appellant has no interest in any specific property of Bullseye. And, even though appellant’s percentage interest in Bullseye is greater than that in Swart (between 1.12 to 4.75 percent versus 0.2 percent), both are undisputedly minority interests. Therefore, like Swart’s interest in Cypress, appellant’s interest in Bullseye closely resembles that of a limited, rather than a general, partner, and there is no evidence that appellant had any ability or authority, directly or indirectly, to influence or participate in the management or operation of Bullseye. [footnotes omitted]


The conclusion of the Board of Tax Appeals is clear:


[W]e reject FTB’s 0.2 percent ownership threshold as the new bright-line legal standard for distinguishing between an active and a passive ownership interest in an LLC classified as a partnership.


Unlike the earlier decision in Satview Enterprises (which was not precedential), this decision will soon be precedential. The big question is whether the FTB will appeal into the California court system. There’s a definite possibility they will (it would be consistent with the FTB’s general legal practices). No matter, this decision is excellent news for owners of minority interests in California LLCs.


(It’s also, overall, excellent news for California. You want to encourage investment in the state. The FTB’s policy of demanding the $800 for minority interest in California LLCs discourages California investment.)


If you have a non-California LLC that has been forced to pay California LLC tax for indirect interest in a California LLC (or a foreign LLC doing business in California), you should consider filing a claim for refund–or a protective claim if your statute of limitations is nearing expiration.

Case: In the Matter of the Appeal of Jali, LLC




Gordon Presents Fiscal Democracy In The States: How Much Spending Is On Autopilot? Today At Loyola-L.A.

By Paul Caron


Governors, lawmakers, and journalists often decry constitutional and statutory formulas, federal grant requirements, and court rulings they think excessively limit state budget decisions.

Some observers estimate as much as 70 percent of state spending is “on autopilot,” meaning these constraints are in place before proposals or negotiations begin.


But measuring predetermined state budget commitments is far from straightforward. The federal government explicitly defines “tax expenditures” and “mandatory spending” and reinforces these concepts through the annual budget process. In contrast, few states rigorously and transparently assess the long-term cost of tax breaks and spending programs that are either fixed in size or will grow automatically without policy changes.


In this report, we perform a first-of-its-kind analysis of how much spending was restricted or partially restricted in CaliforniaFloridaIllinoisNew YorkTexas, and Virginia from 2000 to 2015.


Key findings:

  • As much as 70 to 90 percent or as little as 25 to 50 percent of total state spending (including federal funds) was restricted in 2015.
  • State budgets appear to be growing more restricted over time.
  • Comparing spending growth by category to spending growth overall, we find that cash assistance, higher education, and corrections bore some of the squeeze on spending.



  • States should measure and monitor the extent and growth of their fiscal constraints.
  • States should prepare current services budgets showing the cost of maintaining existing services given caseload and price increases and assess proposed policy changes against this baseline.


For additional details on data sources and methods, as well as supplemental state background, see the data appendix




How to win your fantasy football league in 2019? Use valuation methodologies

By Jason Mutarelli


Are you ready for some valuation?!?!


Fantasy football season is in full swing. As a valuation professional, this is the time of year when I’ve come to realize I enjoy mixing business along with the, well, the serious man cave-dwelling business of the fantasy football draft. There are many similarities in determining the value of NFL players for a fantasy football draft and determining the value of a business. Business owners and fantasy football players should constantly monitor value to take advantage of opportunities. Here are my top tips from the world of business valuation that just might help you crush your fantasy football league championship this season.


Tip #1: Maneuvering the draft with data on your side

Nearly all fantasy football leagues begin with a standard drafting format where a random selection process determines the draft order. Two draft formats are used: snake or auction drafts. Before we discuss player acquisition strategies for each draft format, let’s review the valuation methodology of the market approach.


When valuing businesses using the market approach, the price of comparable enterprises is used to help determine the price of a business. For acquisitive companies and private equity firms, buying businesses at or below the prices of comparable enterprises is an ideal means of creating value for the acquiring company. The same approach rings true when building a powerhouse fantasy football team with value for the acquiring league participant.


In the snake draft, each fantasy coach has one pick in each round in a predetermined order that then reverses at the end of each round. For example, in round one the player selection process moves from team 1 to 10, then round two will go from 10 to 1 — in other words, the draft snakes back on itself. Snake drafts are commonly used in fantasy football leagues to allow for a fair and balanced draft.


In an auction draft, each team receives a predetermined budget, or a cap, with which to “purchase" their coveted team roster. Players are acquired by the team placing the highest bid. The auction draft concludes once every team’s roster is complete.


In a snake draft format, mock draft results and average draft position (ADP) based on the scoring rules in your fantasy football league offer helpful data points as to how fantasy football market participants view each NFL player. The ADP establishes comparable market data, a useful metric when selecting players to build your team in a snake draft. For example, if you have draft pick position five in round three (3.5), focus on drafting players with ADPs at or below 3.5. Drafting players with higher ADP values than your draft pick position, could make for a long fantasy football season.


In an auction draft format, a useful comparable market data point is the average auction value (AAV) for each NFL player based on fantasy football league scoring rules. AAV stats identify what other auction draft-based leagues have paid for each player and can be leveraged to determine how much you are willing to bid per player in an auction draft.


Acquiring players at prices consistently at or below AAV effectively employs draft capital and allows enough cap space to fill a team’s roster with highly ranked, highly valued players. Acquiring a fantasy player consistently above AAV is not an effective deployment of draft capital — this approach will more than likely fill your roster with overpriced, lower-ranked players because you will risk blowing your budget and your season.


Tip #2: Projecting the growth of your fantasy football franchise

Determining the value of a business enterprise using the income approach is based on expected future cash flow, future revenue growth expectations, operating profits (and more, but I’ll keep it short), as well as the perceived risk of those cash flows. The higher the expected cash flows and the lower the perceived cash flow risk, the higher the value of the company — and, vice versa for lower cash flow and higher risk = lower value.


Similar to valuing a business, the use of projected data is a useful tool when building and assessing your fantasy football team’s value. A fantasy football team roster with high projected fantasy points (FPTS) and low perceived risk represents an NFL player roster with great present value.


However, expected future cash flows are also worth less today because of the time value of money and the risks associated with achieving projected cash flows in the future. As a valuation professional, it is critical that I have a deep understanding of a client’s industry, as well as their competitive factors, historical performance and economic factors. Foreseeing headwinds or tailwinds for a company allows assignment of a discount or a premium to a business, similar to fantasy player projections — and that leads to my next tip.


Tip #3: Insulate your roster from risk with discounts or premiums

Regardless of draft style, before you draft your fantasy football team roster, consider the projections for each NFL player, specifically the projected FPTS for each player. When you are bidding on players, you are really bidding on a set of point values and the risk of achieving those points for your team.


Let’s suppose two running backs are projected to earn the same amount of FPTS for the season. One RB, let’s call him Cosgrove Shumway, is returning to the field after a season-ending injury; a contract dispute also kept him out for most of the pre-season. Another RB, Legume DuPrix, injury-free, participated in and performed well all pre-season, and he has little competition from other RBs on the team roster. The risk of Shumway achieving the projected FPTS is clearly higher than that of DuPrix.


If you perceive a higher risk for a player, in a snake draft you should discount where to select that player; in an auction draft, you will want to discount the price you are willing to pay for that player.


Work hard, play hard

No matter the methods applied, a comprehensive valuation considers factors such as the history and market position of a business, the strength of customer relationships, competitive threats and market opportunities. Further, industry impacts, company forecasts, economic trends and an evaluation of risk and return are also considered. In short, a careful valuation process should be part of standard operating procedure as a critical management exercise with an eye toward continued success and wins for the firm.


Likewise, valuation methods can present practical tools to determine the value of players to select for your fantasy football league roster and can result in a winning season. However, fantasy football drafts rarely go as planned. Gut feelings, sleeper potential, favorite team/player selection drama can all derail the best laid draft plans. But no matter. If you’ve been patient enough with your league’s draft, I am sure you are just as excited for kickoff as I am!

Jason Mutarelli 

Senior vice president, Valuation Research Corporation




No, The US Is Not Overtaxed

By  Howard Gleckman & Aravind Boddupalli


Despite what you may have heard, Americans are taxed less than residents of almost any other major developed country. And in 2017, the US ran a budget deficit that was bigger, as a share of its economy, than all other developed countries.


The data are from the Organisation for Economic Co-operation and Development (OECD) and they are striking. In 2017, total tax revenue for all levels of government (federal, state, and local) in the US was 27.1 percent of Gross Domestic Product (GDP)—far below the OECD average of 36.1 percent. Of the 36 OECD nations, only five collected less tax as a share of their economy than the US.

What about the deficit? In 2017, of the 36 OECD countries, the US was dead last for the size of its federal budget deficit as a share of GDP at 4.1 percent. The OECD average: 0.3 percent of GDP. About one-third of the 36 nations ran surpluses that year, including Greece(!).


Keep in mind that the OECD averages are weighted for GDP for all countries except the US. In addition, they are for 2017. In 2018, US federal receipts fell significantly, due to the Tax Cuts and Jobs Act (TCJA), while state and local revenues rose thanks to the strong economy and some elements of the TCJA. The US federal budget deficit also increased that year, thanks to a combination of the 2017 tax cuts and congressionally-mandated spending increases.


Most troubling about this fiscal situation was that federal receipts were low and falling, and the deficit was high and rising, at a time when the US economy was strong.


These numbers are good to remember next time someone tells you the US is overtaxed. We are not, relative to the rest of the world or relative to our demands for public benefits and services.    



Forms and Follies: IRS Midcourse Corrections of Tax Forms

By Robert A Weinberge


The great architect Louis Sullivan once wrote, “form follows function.” I can’t help but wonder if, in the less stable world of tax, new IRS forms follow dysfunction.


In 2017, President Trump promised that, “Under our plan, 95 percent of Americans will be able to file their tax returns on a single page without having to keep receipts, fill out schedules, or track endless paperwork. We're giving hardworking Americans their time back, and we're giving them their money back.”


Among the many changes wrought by the resulting Tax Cut and Jobs Act (TCJA) were the births of multiple new tax forms, including a new Form 1040 and a new tax withholding Form W-4. Their stated aim was to simplify tax filing.


That’s not quite what happened. 


Post TCJA, the IRS cast aside the familiar 80-year-old 1040A short form, the nearly 40-year-old abbreviated Form 1040EZ, and the traditional Form 1040. The agency replaced them all with a shorter, two-page, 23-line 1040 that tried to achieve Congress’ pledge to acrobatically cram the form onto a postcard. But it could only attempt to do so by adding six schedules.


The new Form 1040 caused considerable confusion, frustration, and ridicule. My Tax Policy Center colleague Howard Gleckman called it a “slight of hand gimmick… little more than a public relations stunt” And he noted it still didn’t fit on a postcard.


Then-National Taxpayer Advocate Nina Olson predicted that the new Form 1040 “will cause additional complexity and hassle for many taxpayers and preparers,” increase the risk of transcription errors, and result in higher bills from tax practitioners. 


Now the IRS is attempting to make amends. Modestly.


The New, New Form 1040

On July 11, the IRS released a new draft Form 1040 reordering information and adding back to the Form 1040 data that had been on the supporting schedules. One commentator notes, with nostalgia and some exaggeration, that “everything old is new again.” Another says it’s still “definitely not a postcard. More like a greeting card. Or a sympathy one, maybe.”


The latest draft is more than a tune-up but less than an overhaul. Among the key changes from last year: It returns the standard deduction and income reporting and reconciliation to the first page of the income tax return (now including capital gains), it ends the page with taxable income, separates tax credits, moves signature lines to page 2, and pares those six supplementary schedules to three.


Oh, yes, there’s also a new tax form available for those 65 and older, the 1040-SR (an idea proposed by Henry Bloch 45 years ago), mandated by the Bipartisan Budget Act of 2018.


Form W-4, Too

Then there’s the new W-4 that enables employees to establish or adjust their income tax withholding. Because the TCJA made significant changes to the individual income tax, the IRS released a revised Form W-4 for 2019 in June 2018 and undertook an extensive campaign, including over a dozen press releases, to urge filers to take a “Paycheck Checkup” with its Withholding Calculator and, if necessary, complete a new W-4 form.


But few taxpayers recalculated their withholding—less than one in five, according to one survey. If it took Taxpayer Advocate Olson three tries to get her withholding correct, you know improvement was needed.


And tax practitioners complained that the new W-4 added compliance burdens, reduced accuracy, compromised employee privacy, disadvantaged small businesses, and required more education of employers and employees. In response, the Treasury Department delayed implementation of a new form until 2020.


This August, the IRS released a second redesigned draft W-4 for 2020 and replaced its online calculator with an improved mobile-friendly Withholding Estimator. It says the new W-4 “uses a building block approachthat replaces complicated worksheets with straightforward questions” to improve accuracy. It’s too early to tell whether it will work.



So why does this matter?


First, it illustrates the tax code’s complexity and how difficult it is to simplify forms without first simplifying the underlying law. And it reaffirms that reconfiguring a set of tax forms is not real simplification.  


Second, it is a reminder that 95 percent of taxpayers now use do-it-yourself software with a Q&A format or employ return preparers to file for them, which blunts and masks the impact of complexity—few taxpayers actually fill in a Form 1040 by hand anymore.


Third, the form revisions highlight the need for real reform in tax administration: The IRS is coping with budget and staff cuts, declining customer service and enforcement, and mandates to implement new laws.  At the same time, urgent IT needs are unmet. It is a constant struggle to repair the tax administration ship while navigating tax seasons successfully. If basic forms require repetitive revisions, what deeper, less visible functions need attention?



The TCJA’s Cap On Mortgage Interest Deductions Tells Us That Taxes Matter, Up To A Point

By Robert McClelland & Safia Sayed


When Congress passed the Tax Cuts and Jobs Act in December of 2017, it made a number of changes to the individual income tax (almost all of which sunset after 2025).  One of these changes lowered the value of mortgages on which homebuyers could deduct interest from taxable income from $1 million to $750,000.  Which raised a question: Would the tax change encourage homebuyers in 2018 to shrink the size of their mortgages from $1 million to the still fully-deductible $750,000?


The answer turns out to be…complicated.  And it suggests that while the revised tax law may have changed the behavior of some homebuyers, the effects may have been limited by other, non-tax factors.


We plotted mortgages completed in 2017 and 2018 and found that for 2017, the number of high-dollar mortgages (defined as those over $700,000) taken out had noticeable spikes at several dollar amounts ($750,000; $800,000; $900,000; and $1 million).  The largest of these spikes was at $1 million. For 2018, the overall pattern was similar, with a large spike in mortgages taken out at $1 million, but the largest spike was for mortgages of $750,000.  So, it appears that tax incentives do matter to people taking out mortgages. But we also found a fairly large number of million dollar mortgages taken out in 2018, even though interest on those loans was no longer fully deductible. Taxes matter, but so may other factors, such as the inertia of lenders or other features of the home-buying process.

Source: Consumer Financial Protection Bureau, Home Mortgage Disclosure Act Snapshot National Loan Level Dataset (2018).


We weren’t surprised to see the sharp spike in the number of 2017 mortgage loans at exactly $1 million; the deduction of mortgage interest had been limited to $1 million mortgages since 1986.  While it is possible to take out a larger loan and just deduct interest on the first million dollars, filing taxes is easier if a person takes out a $1 million loan and a subordinate loan for the rest.


When 2018 data were recently published, we confidently expected that the spike would shift down to the new deductible limit of $750,000. And we did see the largest number of high-dollar mortgage loans move from $1 million to $750,000. This reflected a 50 percent increase in the number of $750,000 mortgages, combined with a 10 percent drop in the number of $1 million mortgages.


Why do people continue to take out $1 million loans? Perhaps it’s just because it’s a round number.  More likely, lenders are used to approving $1 million loans for high-end buyers and continued to do so even after the law changed. We don’t know whether the borrowers understood that interest on a quarter of their loan —$250,000—would no longer be deductible. Perhaps they are looking forward to deducting the additional interest in 2025, when the law sunsets.


It’s clear that the TCJA had an effect on the behavior of mortgage borrowers. But we may have to wait for a few more years to know whether the TCJA’s lower deduction cap on mortgage interest will overcome the lingering effects of the prior law and lender habits. 



Hard to decode: Preparers discuss the TCJA’s biggest challenges

By Jeff Stimpson


As the Tax Cuts and Jobs Act begins the march toward its second full filing season, preparers have had plenty of time to recognize how much reform accomplished its stated goal of simplifying the tax system.


The answer: not much. Here are what preparers claim are the biggest challenges of the TCJA so far.


 “Just learning all the new forms!” said Terri Ryman at Southwest Tax & Accounting, in Elkhart, Kansas. “The postcard is definitely a joke. And I’m glad to hear that it will be gone for 2019. It’s so difficult to review with clients, I just quit reviewing the form itself and went to the prior-year comparison page in my software to compare changes with clients.”


Class is in

“Trying to educate clients of the true impact of tax reform — it’s more than the refund,” said Twila Midwood, an Enrolled Agent at Advanced Tax Centre, in Rockledge, Florida, “as well as trying to obtain our education on this major reform.”


Event horizons

“Planning and compliance,” said Mary Kay Foss, a CPA in Walnut Creek, California. “Planning was difficult in 2018 because we didn’t have all the information to plan for the effect of Section 199A. Some recommended strategies, such as increasing retirement contributions to reduce AGI, also reduced income subject to 199A. That wasn’t clarified until early in 2019. So many states also didn’t comply with the TCJA so it became difficult to project taxable income with different tax regimes. Compliance was complicated because the software companies continued to update their products as new pronouncements came from the IRS — a result would change by recalculating it a week later.”

Withhold on

W-4 2018

“Managing client expectations, gently reminding them that they’ve misunderstood or misapplied information they got elsewhere (or from me),” said New York EA Phyllis Jo Kubey. Also “calculating and adjusting client withholding (for individual clients).”


Qualified — or not?

“Confirming that we classify a business correctly to qualify or not for the 20 percent deduction under Section 199A,” said Gail Rosen, a CPA in Martinsville, N.J. “For most businesses we can determine if their business activities qualify, but for a few it’s somewhat ambiguous.”


EA Debra James, of Genesis Accounting & Management Services, in Lorain, Ohio, is “getting more comfortable with the changes but I am still trying to find a comfort level with software and the way it applies the new rules on returns and tax planners. Also,” she added, “it’s challenging to find research material that’s current and accurate. There was so much speculation, misinterpretation and misunderstanding throughout 2018 that if you Google a question to look for guidance, you’d better be sure that your answers are current and from a reliable source.”


Political lessons

“The code itself and the plethora of sunset provisions and how that impacts the future,” said Morris Armstrong, an EA and registered investment advisor at Armstrong Financial Strategies, in Cheshire, Connecticut. “We need to operate under today’s code, but politics also dictate the code and I have little doubt that should the makeup of the House, Senate and executive branch align with the Democrats, CE providers will make a fortune.”


“Intransigence,” said Bill Smith, a Bethesda, Maryland-based managing director for CBIZ MHM’s National Tax Office. “Neither party is willing to budge to get any tax legislation passed. The Democrats felt left out of the process entirely when the TCJA passed, so they are unwilling to help the Republicans clean up the messes caused by the TCJA, or to cooperate with extenders, without extracting a pound of flesh. Republicans know that any tax legislation has to start in the House, so the Senate can’t really push any new ideas or even fixes. Majority Leader Mitch McConnell seems unwilling to bring tax legislation to a vote in the Senate. Democrats running for president have widely divergent sets of proposals, so they’re not going to back something different unless and until they’re no longer candidates.”


“There’s no consistency in how Congress changes the tax laws,” said Bruce Primeau, a CPA at Summit Wealth Advocates, in Prior Lake, Minnesota. “For example, with all of the tax law changes that just went into effect in 2018, those laws sunset in 2025 and everything reverts back to the way it was in 2017. So just when you’re finally able to master some of the changes, everything changes back.”




Tax Cut 2.0 looks different to Trump than to GOP lawmakers

By Laura Davison


One of President Donald Trump’s favorite political promises is a second tax cut. But lawmakers in Congress — who would need to develop and pass another reduction — are more focused on making their first tax cut permanent.


Trump on Thursday promised House Republicans another middle-class tax cut that he said would be “very substantial” and “very, very inspirational,” without giving details. Republican leaders say they support the idea, but they haven’t detailed what a plan would look like. Trump has said his proposal will be released next year, in time to be a campaign issue ahead of the 2020 election.


“We will gather together the best ideas from the Hill and the administration and the outside groups to provide a significant new round of middle-class tax relief,” White House Economic Adviser Larry Kudlow told reporters Friday. “This is not a recession measure at all. The economy is very strong.”


Congressional tax writers, led by Senate Finance Committee Chairman Chuck Grassley and the House Ways and Means panel’s top Republican, Kevin Brady, are focused on a different Tax Cut 2.0: Preserving the individual rate reductions from their 2017 law that are set to expire in 2025.


“The first and most important step is we can make the cuts for families and small business permanent,” Brady told reporters Friday at a House GOP policy retreat in Baltimore. He was referring to the lower rates for individuals and pass-through companies that were made temporary in the GOP’s signature tax law to avoid running afoul of budget rules.


Because of the projected $1 trillion-plus deficit impact of the GOP’s tax code overhaul, only the corporate rate cuts and some of the structural changes were made permanent. Even before the temporary individual tax cuts run out, some breaks for companies purchasing new equipment will expire in 2022, and those for the beer and wine industry will expire at the end of this year.


Congress — with a Republican-led Senate and a Democratic-led House — would have to pass another law to extend those cuts.


Campaign promise

Brady led an effort to make all the temporary tax cuts permanent last year when the Republicans still had the House majority. However, his Republican colleagues in the Senate, who only had a slim majority, didn’t bring up the matter because of fears it wouldn’t get the 60 votes required to pass.


That inaction suggests that more piecemeal extensions of provisions that expire at different times are more likely, rather than preserving the whole law with one vote. Lawmakers, regardless of which party controls Congress, have often voted to extend tax breaks just before they’re scheduled to disappear.


Trump made a similar promise to cut middle-class taxes before last year’s midterm election as House Republicans struggled to counter Democratic talking points that the 2017 overhaul mostly benefited the wealthy. The president’s proposal caught Republicans off guard, and nothing ever advanced as Brady tried to cast it as part of a unified GOP plan to extend the 2017 cuts.


For now, an additional tax cut would be nearly impossible as Republicans and Democrats remain diametrically opposed, said Adam Michel, a senior policy analyst at the Heritage Foundation. With the 2020 election likely to deliver a still-divided government, further tax cuts are unlikely unless the economy takes a serious turn for the worse, he said.


“But if we actually entered a recession, the conversation would be very different,” Michel said.




IRS offers to settle with insurance tax scammers

By Michael Cohn


The Internal Revenue Service is sending letters to up to 200 taxpayers who have been under audit for participating in micro-captive insurance tax schemes, offering to settle with them, but only if they respond in a limited time.


The IRS has been targeting what it calls “abusive” micro-captive insurance transactions for years, listing them on its annual list of the so-called "Dirty Dozen" tax scams since 2014. On that list, the IRS noted that the tax laws generally allow businesses to create “captive” insurance companies to insure against risks, so the insured business claims deductions for premiums paid for insurance policies. However, in some “micro-captive” structures, promoters, accountants or wealth planners persuade business owners to participate in scams that lack many of the attributes of insurance. The IRS has pursued hundreds of cases against such schemes in Tax Court and by putting taxpayers under audit. To expedite the cases, the agency began mailing out time-limited settlement offers to up to 200 of the taxpayers under audit spelling out specific settlement terms. Taxpayers who don’t receive a letter aren’t eligible for this resolution, the IRS pointed out.


After prevailing in three recent U.S. Tax Court cases, the IRS said it has decided to offer settlements to the taxpayers who are currently under exam.


The IRS noted that it has consistently disallowed the tax benefits claimed by taxpayers in abusive micro-captive structures. While some taxpayers have challenged the IRS position in court, none have been successful to date. The IRS said it would continue to disallow the tax benefits claimed in abusive micro-captive transactions and continue to defend its position in court. The IRS has decided, though, to offer to resolve some of the cases.


“The IRS is taking this step in the interests of sound tax administration,” IRS Commissioner Chuck Rettig said in a statement Monday. “We encourage taxpayers under exam and their advisors to take a realistic look at their matter and carefully review the settlement offer, which we believe is the best option for them given recent court cases. We will continue to vigorously pursue these and other similar abusive transactions going forward.”


The settlement offer will require substantial concession of the income tax benefits claimed by the taxpayer together with appropriate penalties, unless the taxpayer can demonstrate “good faith, reasonable reliance,” according to the IRS. The initiative is currently limited to taxpayers who have at least one open year under exam. Taxpayers who also have unresolved years under the jurisdiction of the IRS Appeals office may also be eligible for the settlement, but those with pending docketed years under the IRS General Counsel’s jurisdiction aren’t eligible. The IRS said it is continuing to assess whether the settlement offer should be expanded to others.


Taxpayers who receive letters under the settlement offer, but who decide not to participate, will continue to be audited by the IRS under its normal procedures. The potential outcomes could include full disallowance of captive insurance deductions, inclusion of income by the captive, and imposition of all the applicable penalties.


Taxpayers who decline to accept the settlement offer will still have full rights to an appeal with the IRS, but the IRS Independent Office of Appeals is aware of the resolution initiative and isn’t likely to grant a sympathetic ear.


“Given the current state of the law, it is the view of the IRS Independent Office of Appeals that these terms generally reflect the hazards of litigation faced by taxpayers, and taxpayers should not expect to receive better terms in Appeals than those offered under this initiative,” the IRS warned. “Taxpayers who are offered this private resolution and decline to participate will not be eligible for any potential future settlement initiatives. The IRS also plans to continue to open additional exams in this area as part of ongoing work to combat these abusive transactions.”





Trump says he plans to unveil middle-class tax cut in next year

By Laura Davison


President Donald Trump said Thursday that he’s planning a tax cut directed at the middle class that will be announced in the next year.


“It will be a very substantial tax cut,” Trump told congressional Republicans at a retreat in Baltimore. He said the tax cut would be “very, very inspirational” without providing details.

Trump spoke a day after deciding against cutting the tax on capital gains by indexing gains to inflation. That decision was announced late Wednesday after a meeting earlier between the president and his economic advisers, who discussed whether to move ahead with the tax break.


The administration has also put off the idea of a possible cut in payroll taxes, Treasury Secretary Steven Mnuchin told CNBC earlier Thursday. Mnuchin said that Trump was focused instead on a second round of proposed tax cuts.


But a Trump-backed tax cut would face a near-impossible battle in Congress in advance of the 2020 elections. Constitutionally, tax legislation must originate in the House, which Democrats currently control. They are unlikely to back any legislation that could give Trump a victory during the presidential election campaign.


Key Democrats in Congress, including House Speaker Nancy Pelosi and House Ways and Means Committee Chairman Richard Neal, have said they could consider cuts to levies on the middle class, but those cuts would have to be offset with higher taxes on the wealthy.


That trade-off — if Trump and Democrats could compromise — could cause no-new-tax Republicans to balk, making agreement nearly impossible in a divided government.


Trump last month floated the idea of indexing capital gains to inflation or cutting payroll taxes as a way to jolt the U.S. economy, which has shown warning signs of a slowdown. But he later said that cutting capital gains taxes would be seen as “somewhat elitist” because it would benefit the wealthy.


Most of the benefits of indexing would go to high-income households, with the top 1 percent receiving 86 percent of the benefit, according to estimates in 2018 by the Penn Wharton Budget Model. The policy could reduce tax revenue by $102 billion over a decade, the model found.


This isn’t the first time the White House has floated a tax cut when facing political headwinds. Last fall, ahead of the midterms where Republicans ultimately lost their majority in the House, Trump suggested he would cut taxes for middle-earners by 10 percent.


The tax cut announcement came as a surprise to administration officials and Trump’s allies in Congress. That plan was never released.


Again in August, Trump said “a lot of people” would like a cut in payroll taxes, but then said that a reduction isn’t needed. A day later, he said he was still open to a payroll tax break and cutting taxes for investors by indexing capital gains taxes to inflation, a move some of his advisers think he could do without Congress.


And late in 2017, as the Republican tax overhaul was taking shape and criticism arose that it would favor the wealthy and corporations, Trump promised relief for the middle class. But that did not make it into the final legislation.




Is your client on the hook for communications tax?

By Toby Bargar


When people think of communications tax, thoughts often run to the long list of taxes and fees on their wireless or cable bill that always seem to make the total more than expected.


In reality, these bills show a consolidated view of taxes and fees — the actual list is much longer. What many businesses don’t realize is that communications tax applies to much more than just the wireless and cable industries. If your client is providing any service with voice, video or connectivity, there is a good chance they may be on the hook for communications tax.


Today, when a business evaluates offering a new service that has these capabilities, including for the growing internet of things (IoT) market, accountants must also determine if there will be a communications tax liability. As we covered in the first article in this series, "Why are communications taxes so complex?,this can be a very difficult task for those who are not extremely well-versed in the nuances of communications taxation. In this article, I’ll break down the four primary categories of products or services you should keep an eye out for, as well as some key industries and product types that might give you a hint.


Identifying communications tax red flags

There is a likelihood that a product is communications taxable if it includes voice, video or connectivity capabilities, including IoT. It can be either a standalone offering or a service or a platform that embeds one of these capabilities. As you examine a product in more detail, always look for some key red flags indicating it might have communications tax liability:


1. Voice: Voice communications have the strongest potential for communications taxability. This is not limited to traditional wireline and wireless calls. Some — but not all — VoIP applications, as well as software applications with an embedded voice support feature, can also be communications taxable.


Another often-overlooked category is managed service providers or value-added resellers that include voice or other communications services in their portfolio offerings. Simple add-ons like reselling phone services can trigger a communications tax responsibility.


In any of these cases, it is important never to assume communications taxability. Accounting professionals need to carefully assess each situation for specific rules by product, bundle and jurisdiction.


2. Digital content: Digital video and audio content, whether streamed or downloaded, is one of today’s most diverse communications tax scenarios. It’s a rapidly growing and changing market as we become a nation of cord-cutters, leading to intense competition with major industry players in cable, content, and wireless. In the U.S., the number of digital video viewers is projected to surpass 236 million by 2020, and the global video streaming market is expected to be worth more than $125 billion by 2025.


Because digital content strategies typically combine many different product types into complex, frequently changing bundles with highly varied and changing tax rules, accountants who are new to communications tax often find it difficult to keep up. If your client is offering these services, you should consult an expert in this space.


3. Connectivity: Any company offering connectivity services, such as internet, VPN and software-defined wide area networks (SD-WANs), may have communications tax responsibility. This is another often-overlooked area of communications tax as data centers, MSPs and system integrators frequently don’t realize there may be more than sales and use tax responsibility in many states.


With the predicted explosive growth of 5G-powered IoT and edge computing, the number of MSPs and SIs potentially offering or bundling connectivity services could grow exponentially. It’s critical for accountants to understand where communications tax responsibility lies within their client’s supply chain.


4. IoT and connected devices: IoT applications use sensors attached to devices to collect and analyze millions of points of information to gain a seemingly unlimited range of insights. Whether they’re tracking the smallest internal status and movements of an individual cow or the entire herd, the daily needs and machinations of your home appliances, or complex logistics for the largest global ports and traffic systems, IoT devices and the sensors that power them collect and transmit enormous volumes of data.


And it is that transmission that in many cases could be communications taxable. Many of these use cases are B2B-related, but not always. This determination is challenging and technical.


My business or client might be on the hook — now what?

From traditional telecom providers to software providers and even tractor manufacturers, as today’s companies mature and diversify, they often look to add new services. If these new services include any form of communication, it’s essential to understand whether or not communications tax will be required. It’s a complex web of tax rules and regulations to untangle. If you are new to communications taxation or just feel unsure, the best advice is always to get help from a communications tax or regulatory expert. It is far better to assess a product or service and exclude taxability than to ignore the consideration and miss the responsibility, which can result in a significant financial hit and frustrated customers.


Once you know for sure, you can take the necessary steps to prepare. From technology systems and setup to compliance and regulatory expertise — getting a firm foundation will help minimize risk and likely save countless headaches.




IRS finalizes rules for 100% depreciation deduction

By Michael Cohn


The Internal Revenue Service and the Treasury Department released the final regulations Friday for the new 100 percent additional first year depreciation deduction included as part of the Tax Cuts and Jobs Act, allowing businesses to write off most depreciable business assets in the year they are placed in service, along with a new set of proposed regulations on the tax break.


The deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture usually qualify for the deduction. It applies to qualifying property acquired and placed in service after Sept. 27, 2017.


The document issued Friday finalizes the proposed regulations that were issued in August 2018 to implement some of the provisions of the Tax Cuts and Jobs Act of 2017, but it also includes some new provisions that weren’t addressed previously. They include some clarifying guidance on the requirements that need to be met for property to qualify for the deduction, including used property. The final regulations also contain rules for qualified film, television and live theatrical productions.


In the new set of proposed regulations, the Treasury Department and IRS also propose rules pertaining to (i) certain property not eligible for the additional first year depreciation deduction, (ii) a de minimis use rule for determining whether a taxpayer previously used property; (iii) components acquired after Sept. 27, 2017, of larger property for which construction began before Sept. 28, 2017; and (iv) other aspects not dealt with in the previous August 2018 proposed regulations. The proposed regs also withdraw and repropose some rules pertaining to the application of the used property acquisition requirements (i) to consolidated groups; and (ii) to a series of related transactions.


For details on claiming the deduction or electing out of claiming it, see the final regs or the instructions to Form 4562, Depreciation and Amortization (Including Information on Listed Property). For tax years that include Sept. 28, 2017, see Rev. Proc. 2019-33 for further information about making a late election or revoking an election.


Taxpayers who elect out of the 100 percent depreciation deduction need to do it on a timely-filed return. Those who have already timely filed their 2018 return and didn’t elect out of the deduction but still want to do so have six months after the original deadline, without an extension, to file an amended return.


The IRS noted that the regulations released Friday have been submitted to the Federal Register and may vary slightly from the published documents due to minor editorial changes. The documents published in the Federal Register will be the official documents.




Communicating clearly about communication

By Amy Vetter

From the Big Four firms, to small family-owned firms, all the way to completely virtual firms, communication is the backbone of a productive work and service environment. While businesses today have more communication channels available than ever before, clear communication strategy still needs to be in place and nurtured in order for accountants to be their best selves, both as colleagues and professionals.


In addition to tried-and-true methods like phone, text and email, there’s an endless array of tools available for specific kinds of communication both between team members and with clients. Understanding how to deploy each of these channels for maximum effectiveness and to reduce stress, rather than create it, is a crucial part of operating a successful accounting practice. Whether you realize it or not, you rely on these communication channels to keep up with the rapid pace of your day. Leveraging them correctly can be the difference between creating a winning culture versus burnout.


This article is not an attempt to provide an overview of communication channels available or the best option in each category. There are plenty of great resources to consult for those decisions. Instead, I want to provide a framework for how to ensure that you implement these solutions in a way that makes them both accessible, productive and not create more stress. When you approach adoption with a clear purpose and defined policies, you limit the risk of creating clutter and confusion.


AT071119-cell phone usage chart


Internal vs. external communication

The most basic distinction between communications channels are those that are customer facing and those are for internal purposes. These two will be mutually exclusive in some cases but not necessarily in others. You may use certain chat communication channels, like Slack or Google Hangouts, only between team members. On the other hand, you may use Slack and work email for both internal and external purposes.


When it comes to delineating methods in this context, what matters isn’t what channel you choose for which purpose, but rather that everyone on your team understands your policy. It’s easy to get into the hype of a new technology tool and want to implement it right away. However, there is more than just the technology to consider — there is also the human connection. Both are equally important, so when creating an implementation plan, it’s important to define what the ROI is of using a new communication tool, what it replaces and how it helps either the people you are working with or your customers.


The advantage in siloing off communication channels with clients is to encourage responsiveness. Many times emails are met with no response when they're being sent to clients, even though it is a high priority for you. When setting up your communication infrastructure, it is important to ask your clients how they like to receive communication and where you may get the fastest response. If you are a person that likes to leave voicemails, but your client doesn’t like to answer their phone or listen to them, you may have a breakdown in the efficiency of your workflow. Defining this upfront, and ensuring you have the technology to meet their needs, can help you and your team to be more effective and create a better client experience overall.


Speciality channels

In addition to channels that serve myriad functions, there are those that are designed for a narrower purpose. You may not consider a project manager solution a communication channel, but for your purposes it is. Selecting these services, whether for email marketing or in-house CRM, should be done on a case-by-case basis. These services can be exceptionally effective in the right circumstances, but they should never be redundant. If you have the capability to execute with the resources at your disposal, there’s no need to add another one.


This can be critical to ensure you are moving a client through the life stages of the engagement they signed on for. By setting auto-responders and automated task reminders, you can make sure you are delivering the work to meet their expectations. Additionally, it creates a pipeline of additional add-on services to eventually propose when they are ready. When this information is locked up in paper or the original person that sold the engagement’s head, there can be revenue left behind. By allowing the technology to do the heavy lifting, and letting it think for you when you are at your busiest, you will not only delight your clients, but uncover the gold that is right there for you to mine.


How to make a channel stick

In the days before cord-cutting and binge watching, all of us had TV subscriptions that included hundreds of channels, but how many did we really watch? Too many options can leave you without focus or direction, so you have to ensure that you aren’t carrying deadweight among your lineup. Nobody is going to remember to turn to the equivalent of channel 186 because that’s where they're supposed to go to request a new keyboard.


Implementing a new communication channel should involve the same amount of research, testing and training as any other tech innovation. Philosopher Marshall McLuhan once said that “the medium is the message.” As a leader in your workplace, you have to decide which media are best suited to relay the messages that keep you growing and thriving. It is important to get feedback from your team that will be using it along the way. Is it something they would want to use, and will it be more effective than the current process? When I first implemented Slack in my yoga studio, the staff didn’t want to change from email communication. I asked them to try it for 30 days and then we would make a decision. Anytime they didn’t use it, I responded back to them on Slack. After they used and understood it, we never went back.


Don’t forget the basics

All of these future-facing communication solutions are great, but they aren’t a replacement for human interaction — oral communication and writing. In fact, these novel channels flourish when they are backed by mindful awareness and empathetic communication. Being a good communicator is platform agnostic, but learning how to use each channel effectively comes down to education.


If you’re willing to do the homework and legwork, you can explore all sorts of forward-thinking communication options. Just make sure you’re putting your time and effort into something that will actually benefit your team and clients, and create greater human connection, rather than less.




Better client meetings: Owning the process

By Kyle Walters


The balance sheet: As financial professionals, we certainly know our way around this report, since it displays a client’s financial assets and liabilities. However, one very important item the balance sheet doesn’t show is time — one of a client’s most valuable assets. As CPAs, time is one of our most important assets as well. It makes you wonder why such a valuable asset is so often squandered.


Let’s talk about how we can make the best use of client meetings, one of the biggest time commitments on any busy professional’s calendar.


While we complain about having too many meetings to attend, talking with clients and helping them solve their problems is some of the most valuable time you can spend as a financial professional. You’re building relationships. You’re establishing trust. You’re following through and building new commitments. It’s very expensive time for both you and your client. Make sure you are spending it well.


For most CPAs, there are two main types of meetings — strategic and tactical. It’s important to know the difference:

1. Strategic meetings are regularly scheduled agenda-driven meetings. The number of strategic meetings clients have with you is often based on their service-level agreement (annual, semi-annual or quarterly).

2. Tactical meetings are held when a client calls or emails you with a specific question: “I really need to talk to you about X.”


I have learned over my career that the better you get at running strategic meetings with your clients, the fewer ad hoc, tactical meetings you will need to have with them. Clients will begin telling themselves, “I know we’re going to discuss ‘X’ at my next strategic meeting, so I don’t need to keep pinging my CPA with questions.”


Phone call or in person?

With tactical meetings, most of the time a phone call is sufficient. Clients have a specific question, there’s some discussion, and you provide an answer. Done. It doesn’t require a face-to-face meeting. Right after the meeting, you should log your notes and get ready for the next call.


By contrast, strategic meetings are designed around a broader context: “How’s my company doing?” “What are the important numbers we have to go through?” Some clients may choose to have longer-format, strategic meetings over the phone, due to time or location constraints. Clients love having the meeting agenda and discussion on their screens during the calls. With tools like Zoom, clients can see your face during a phone meeting. As long as clients can see your face, trust is building. The human brain makes little distinction between seeing you on camera and seeing you across a table. In a future article, I’ll share pointers about how to set up cameras properly and how to run better online meetings.


Self-service calendaring apps

To keep our schedules sane, we use Calendly at my firm. The online scheduling app lets clients book appointments with us directly. We set aside blocks of time for strategic client meetings. I prefer to have them between 10 a.m. and 4 p.m. on Tuesdays, Wednesdays and Thursdays. By clicking on the Calendly link, clients can go directly into our calendars, select an open time slot and confirm a meeting time. Additionally, clients can change the meeting time on their own if something comes up at the last minute. They don’t have to tie up our staff with last-minute rescheduling requests.


There are two other reasons why I love scheduling apps such as Calendly. First, anyone scheduling a meeting must answer two mandatory questions in order to get onto our calendars:
1. Have there been any changes since our last meeting?
2. What do you want to make sure we are prepared to discuss?


These two questions are pre-populated into the scheduling process. If the meeting requester tries to bypass those two questions, the app won’t let them book the appointment. Second, once the two questions above have been answered and a time slot selected, the meeting automatically goes into our calendar — and syncs with the client’s calendar.


While that may sound like a lot to put on your clients, as CPAs, we’re accountable too. If clients have taken the time to schedule the meeting and frame the agenda, it’s our responsibility to review the agenda well in advance and decide whether or not we’ve allocated enough time — or too much time — for the meeting. After reviewing the meeting agenda, you may discover you haven’t booked nearly enough time for the meeting. In that case you’ll need to prioritize what to discuss. Or you’ll realize that you won’t need a full 60 minutes to cover all the agenda items — a 10-minute phone call should suffice. In that case, have your staff reach out to the client well before the meeting date and suggest a brief phone call or online chat. Clients will appreciate not having to drive all the way down to your office just to have a few questions answered.


I know what you’re thinking. Tools like Calendly are great for younger, tech-savvy clients, but other clients won’t use it. I had the same concern. Our average client is 63 years old. When we sent our first online meeting invitation, we were thinking about half would use the tool. Turns out, more than 90 percent not only used it, but they emailed us specifically telling us how much they appreciated the convenience!


The meeting’s not over when your client leaves the room

After every client meeting, whether in-person or over the phone, make sure you allow at least 15 minutes of buffer time to distill your meeting notes and to determine the appropriate follow-up action items. You need to confirm who is doing what and when, and then you need to prepare a summary letter (a mutual understanding letter) — to be sent to the client.


It’s very important to build a cushion between meetings. That’s where many professionals mess up. They over-pack their calendars and don’t leave enough buffer time between meetings to distill their notes and thoughts. Unfortunately, all the great insights you collected at the meeting go into the wind, and few of the action items and follow-up steps ever get implemented. That’s why you need a carefully structured meeting agenda, so you’re not spending all your time just talking.


Again, when I say to allow an hour for a strategic client meeting, that means 40 to 45 minutes with the client in the room and 15 to 20 minutes of “shadow” work to log your notes and prep your summary letter. By the way, it’s perfectly acceptable — often recommended — to have a junior staffer or administrative assistant in the meeting taking notes. That frees you up for deeper listening. You want to come away from the meeting with answers to the following four questions:

1. What are the updates?

2. What are the discussion points?

3. What are the decision points?

4. What are the action items?


Don’t underestimate the importance of doing your client summary letter right after your meeting.

Research on the so-called “forgetting curve” shows that within one hour, we forget an average of 50 percent of the information we just took in. Within 24 hours, we forget about 70 percent of new information, and within a week, we forget about 90 percent of it. I’ll talk more about Summary Letters and the “Strategic Pop-In” interruption in my next article.


You’re running a thriving practice. It’s easy to feel overwhelmed, especially during busy season, when everyone wants something from you ASAP and urgent requests are being fired at you from all directions. Taking ownership of your calendar is one of the best ways I know to keep your to-do lists and client obligations under control.




IRS is ignoring potential corporate tax cheats, watchdog says

By Laura Davison


The Internal Revenue Service isn’t doing enough to audit corporate mergers and acquisitions and is wasting tens of thousands of days on cases that aren’t likely to generate more tax dollars, the agency’s watchdog said.


IRS employees spent a collective 27,874 work days from fiscal years 2015 to 2018 examining corporate merger and acquisition issues that were ultimately not changed after the audit was completed, the Treasury inspector general for tax administration said in a report released Tuesday.


IRS auditors proposed about $296 million in under-reported taxes tied to corporate transactions in 2018, the report said. That’s down from the $1.05 billion examiners had proposed in 2015. The agency doesn’t necessarily collect that full amount because taxpayers can appeal their cases.


IRS data “indicate that M&A transactions remain an area of potential compliance risk with the potential for large adjustments, but a significant number of staff days are often spent concentrating on no or low-risk M&A issues instead of M&A issues with audit potential,” the report said.


The agency’s management, in its response to the report, said it disagreed with the inspector general’s assessment that they needed a strategy to more effectively select cases to audit. The agency has sufficient processes in place and the rate of companies under-reporting taxes from M&A is low, the IRS response said.


The report comes as IRS audit rates have fallen across the board in recent years. Individuals, businesses and tax exempt organizations have all faced fewer examinations as the agency has lost staff as a result of budget cuts. according to the agency’s statistics.


The IRS has recently revamped its audit strategy to focus on high-risk areas where taxpayers are more likely to avoid taxes, such as offshore private banking and self-employment taxes.


The IRS also has been focusing on crypto-currency tax avoidance in recent months. It sent more than 10,000 letters to taxpayers in July who may have not properly paid taxes on their holding and a top official has said they will soon announce criminal tax evasion cases.




Marcum sanctioned by PCAOB for promoting audit clients as investment opportunities

By Michael Cohn


The Public Company Accounting Oversight Board imposed a total of $525,000 in sanctions against Marcum LLP and its affiliated firm, Marcum Bernstein & Pinchuk LLP, along with one of its partners, for publicly advocating some of their audit clients as investment opportunities at investor conferences in violation of auditor independence requirements.


The auditor independence violations occurred from 2012 through 2015 in connection with the firms’ annual Microcap Conference and their China Conference, which aimed to bring together investors and companies looking for investment. At the conferences, Marcum LLP and two of its senior partners made public statements advocating the investment potential of the companies presenting at the annual Microcap Conference, 62 of which were audit clients of Marcum. In 2013 and 2014, Marcum Bernstein & Pinchuk advocated the investment potential of the companies participating in the firm’s China Conference, seven of which were audit clients.


Marcum Bernstein & Pinchuk specializes in providing audit, accounting and consulting services to Chinese companies listed on the U.S. capital markets. Marcum merged with Bernstein & Pinchuk in late 2010.


In addition to violating independence requirements, the PCAOB said Tuesday that both firms violated quality control standards by failing to appropriately design, implement and monitor their independence policies and procedures. Alfonse Gregory Giugliano, the senior partner who was responsible for Marcum’s independence policies and procedures, approved the firm’s conference without performing any substantial independence analysis, according to the PCAOB. He was sanctioned by the board and ordered to pay a $25,000 civil penalty, while Marcum paid a $450,000 penalty and Marcum Bernstein & Pinchuk a $50,000 penalty.


“Marcum consented to the order without admitting or denying the order’s findings,” the firm said in a statement. “The order emphasizes the PCAOB’s focus on preserving the independence of public accounting firms. Marcum recognizes the importance of auditor independence and the role the PCAOB plays in regulating the accounting profession and is committed to providing services to its clients at the highest levels of integrity, consistent with all applicable laws, regulations and professional standards, including auditor independence. Marcum agreed to voluntarily settle with the PCAOB rather than engage in protracted litigation with one of its primary regulators. Independence and audit quality remain our top priority. As we look forward, we will continue to challenge ourselves to drive continuous improvements in our audit quality, built on a foundation of independence.”




Unclaimed property rules can apply to lost cryptocurrency

By Michael Cohn


The deadline is approaching soon for many businesses to file their reports on unclaimed property, and increasingly, they might want to include reports about lost bitcoins and forgotten cryptocurrency passwords.


Banks, insurers, retailers and state government agencies are often required to report and remit unclaimed funds, such as unused gift cards. With the rise of virtual currencies such as bitcoin and ethereum, and the ease with which passwords and digital wallets and keys can be lost, unclaimed cryptocurrency could become more of a problem for businesses and their accountants.


“There are states that have adopted rules that would include cryptocurrency, unused bitcoins as an example, as a form of unclaimed property,” said Robert Peters, a managing director in the Duff & Phelps Unclaimed Property and Tax Risk Advisory team. “More and more states are not only looking at it but adopting rules, so that unused cryptocurrency would be included in the definition of unclaimed property.”


Before the beginning of November, many businesses are trying to complete their fall filings of accounts and other financial instruments they hold that have gone dormant for a specified period of time, typically three to five years, depending on the state. But there is little uniformity in laws among the different states, so the fall reporting season may involve juggling various due diligence mailing dates and dollar thresholds, along with completing electronic paper filing and payment requirements.


“There’s a major reporting season coming up,” said Scott Regan, a director in the Duff & Phelps Unclaimed Property and Tax Risk Advisory team. “We’re in the midst of it now. The two important dates are October 31 and November 1. There are fully 40 states that have deadlines on those two dates. The problem is that there’s a real lack of uniformity, and the states all have nuanced requirements that make this a headache for corporate accounting professionals at big companies.”


Another complication is the different dormancy periods for various types of property. “That’s the amount of time that a property has to be held before it’s considered to be abandoned and possibly to be reported or remitted to a state,” Regan explained. “There are different notification requirements, or what we in the business would call due diligence. Some states require certified mailings. Certain states have thresholds of over $50 or over $100. Some states want the letters to go out 120 days before a filing deadline, some of them 60. There’s really just a variety of dates, dormancy periods, deadlines and due diligence requirements.”


To bring some consistency to the rules, in 2016 a group known as the Uniform Law Commission passed the Revised Uniform Unclaimed Property Act, but many states haven’t been in a hurry to adopt it. “There have been a number of states that have adopted something that looks like the Revised Uniform Unclaimed Property Act, but adoption has been very slow,” said Regan. “At this point companies have viewed this fall filing deadline as a major headache and certainly quite confusing. For instance, Tennessee just switched from a spring state to a fall state, so it’s a moving target.”


For an individual or business who lost track of their cryptocurrency key or wallet, the lack of uniformity among states could be a problem. “If it went unused for a period of three to five years, depending on the state, the state would have a right to that unclaimed property by the issuing company of the bitcoin,” said Peters. “And don’t think for a second that those companies aren’t being targeted.”


Even though many cryptocurrency exchanges are based abroad, the rules can still apply to the owner if they reside in the U.S. “The rules are where the owner is technically, but the rules are very nuanced,” said Peters.


Cryptocurrency is a relatively new issue, but companies and their accountants have been grappling with unclaimed property rules in more traditional areas for years. Other complexities revolve around loyalty reward programs and gift cards.


“If you’ve bought a saw at maybe Home Depot, you get a reward for every dollar you spend that you can apply,” said Peters. “Typically those types of reward programs are not unclaimed. However, if any of them can be converted in any way or associated with a value that’s equivalent to cash, then it’s treated as unclaimed property. One state specifically has come out publicly in saying that certain loyalty programs are deemed unclaimed property, and that’s my home state of Illinois.”


The changes under the Revised Uniform Unclaimed Property Act could even lead to some confusion for retailers. “In some of these states that have adopted the new rules, previously certain types of gift cards that were not reportable as unclaimed property are now required to be reported as unclaimed property,” said Peters. “A company may think that they’ve been compliant by not reporting, only to find themselves in a bind now that they should have reported.”


Some states are particularly aggressive in auditing unclaimed property and ensuring compliance since it can translate into substantial revenue for them. “Based upon a Supreme Court case, if there is not a known address of the customer or the vendor, then the state of incorporation is the one that’s entitled to that property,” said Peters. “And if you Google ‘unclaimed property,’ you’ll see that Delaware, which is the legal home to over a million companies, has collected over the years billions of dollars as a result of them being the state of incorporation for most of corporate America. As a consequence, they have developed a very aggressive audit campaign because, by their own estimation, over 95 percent of corporations that are incorporated in Delaware in their view are not compliant with the unclaimed property laws. So they have conducted over the last decade or more very aggressive audits, which have secured hundreds of millions of dollars. And many of the largest companies end up paying tens or more millions of dollars because their aggressive audit practices have included estimating liabilities currently under their laws going back 15 years if a company doesn’t have adequate records. So it’s a big deal for companies.”


Delaware is not alone in pursuing the potential revenue from unclaimed property. “What recently happened is not only Delaware a big player in this space, but other states have also taken an increasingly aggressive approach,” said Peters. “They have hired third-party contingent-fee auditors that audit on behalf of multiple states, up to 30 or 40 at a time, seeking recoveries of unclaimed property, of which less than 2 percent actually gets returned to the true owner.”


Companies need to be aware of the changing rules and the varying deadlines for unclaimed property. “Most of the states have compliance reporting in the fall, which is either an October or a November deadline,” said Peters. “All of the states have specific, definitive rules of what and how property gets reported. But most importantly, these rules have dramatically changed over the course of the last several years, so even companies that may be very sophisticated may not be aware of many of the nuances of the changes in unclaimed property reporting. The states view companies that don’t fully comply as the first targets for conducting these audits, so it’s a big deal, and for many companies it’s a huge compliance burden.”


States have grown more sophisticated in identifying potential targets for noncompliance. “The risk is that for most corporations, they either are not compliant, and there are huge penalties and fees for not reporting,” said Peters. “But it’s the single source of what the states look at for purposes of determining which companies are being audited. These states are very sophisticated in identifying what types of industry and company are prone to being not compliant. By way of example, a current audit program is targeting U.S. companies that are owned by foreign parents, because you’ll typically find that the foreign parent is not familiar at all with U.S. domestic unclaimed property rules, and it seems to be a sweet spot for the states to focus attention upon. If you give thought to how many U.S. operating companies are owned by foreign parents, it’s a large population. As an industry, they tend to be less compliant.”


There are also tax implications for companies that tend to deduct such expenses as a cost of doing business, and the accounting rules for revenue recognition also apply. “Most of the corporations have already claimed these amounts as expenses,” said Peters. “Think about it. If you’ve issued a customer credit, you’ve already reduced your sales revenue by the amount of the credit you give to the customer. Same thing if you’ve issued a check to a vendor and it didn’t get cashed. It would be an expense. However, there is a whole series of new accounting rules that were issued on some of the more complicated situations like gift cards. When and how do you record as income that breakage, and the rules for tax and the rules for the accounting are very different from the unclaimed property rules. Basically companies that issue gift cards have to have three sets of books: one for unclaimed property, one for tax and one for what they report in their financial statements. Essentially they have to track what the rules are, by gift card oftentimes, for each of those reporting requirements.”




Audit committees making more disclosures

By Michael Cohn


Public companies and their audit committees are revealing far more about their auditing firms, audit fees and audit partners this year, according to a new report from Ernst & Young.


The EY Center for Board Matters released a report last week, “What audit committees are reporting to shareholders in 2019,” about the types of information about the audit now available more frequently to investors, beyond the disclosures required by laws or regulations, and how disclosures have increased dramatically since EY began examining them in 2012.


Many investors and regulators contend that increased transparency regarding the audit committee’s oversight process boosts investor confidence and that rigorous oversight of public company audits by independent audit committees helps protect investors.



EY CBM measured the trend by reviewing proxy statements from Fortune 100 companies to compare audit-related disclosures from 2012-2019 to get a clear overview of recent trends.


It found that 80 percent of companies disclosed that the audit committee is involved in selecting the lead audit partner. None of the companies made that disclosure in 2012.


Meanwhile, 90 percent of companies disclosed that the audit committee considers non-audit fees and services when assessing auditor independence, compared to only 16 percent in 2012.


Nearly two-thirds (64 percent) of companies disclose the factors used in the audit committee’s assessment of the outside auditor’s qualifications and work quality, which is four times the 16 percent that did so in 2012.


Two-thirds of companies said they consider the impact of changing auditors when deciding whether to retain the current external auditor, and 78 percent disclose the tenure of the current auditor. That’s up from just 3 percent and 23 percent, respectively, in 2012.




A guide for student loans

The more you save, the less you have to borrow.



Key takeaways

  • Compare costs of different loan options.
  • Look first at federal loans, then consider state and private student loans.
  • Borrowing from your home is also an option.



Every parent dreams that their child will strive for the "brass ring"—a college education that kick-starts a career and a promising future. But these days, that dream is at risk of being tarnished by America's student-debt crisis.


The average annual cost of a 4-year in-state public college, including tuition, fees, and room and board, is $21,370 for the 2018–2019 tuition year, and $48,510 per year for a 4-year private college, according to the College Board.1 No wonder the average graduate in the class of 2016 left college with $37,172 in student loans.2


Important changes

For those borrowing for the 2018–2019 year, rates on federal Stafford loans (described below) for undergraduates have risen to 5.05% annually. Other recent changes, either as part of new legislation or because certain features were allowed to expire, include the following:

  • Rates on future subsidized and unsubsidized Stafford loans will be set at 2.05 percentage points above the yield on the 10-year Treasury note, and capped at 8.25% for undergraduate students.
  • Graduate students are no longer eligible for subsidized Stafford loans, and their rates for unsubsidized Stafford loans rose to 6.6% in 2018. The rate is based on the 10-year Treasury yield plus 3.6%, capped at 9.5%.
  • Graduate students and parents of dependent children taking out federal PLUS loans will face stricter standards to qualify.
  • Interest rates for parents and grad students taking out PLUS loans rose to 7.6%. The rate is based on the 10-year Treasury yield plus 4.6%, capped at 10.5%.
  • In 2015, the White House expanded the eligibility criteria for the Pay As You Earn (PAYE) student loan repayment plan. For successful applicants, monthly student loan payments are capped at 10% of discretionary income.



What to do

"The key is to think ahead and figure out how much in college expenses you can afford," says Melissa Ridolfi, vice president of retirement and college products at Fidelity.


Once you have determined how much you can afford, focus your application process on colleges that fit your budget. Fill out the Free Application for Federal Student Aid (FAFSA) form to find out what grants, scholarships, and financial aid packages each college offers based on your family's expected contribution. Finally, compare total costs.


"If you need to borrow, look first at student federal loan options, because they generally have better rates and repayment terms," says Ridolfi. Also, consider looking at state-sponsored loans, or visit your state's higher education office. For a list of such institutions, visit Ed.govOpens in a new window.


Borrowing options

When shopping for federal student loans, keep in mind that there are 2 types—need based and non–need based. Federal Subsidized Stafford loans are need based. Federal parent PLUS loans and unsubsidized Stafford loans are not, although parent PLUS loans have eligibility restrictions in a new window. Consider each of these loan programs, as well as taking out a home equity loan or line of credit, if available (see chart below).


Compare costs of different student loan options

In financing your student's college education, it's important to shop based on a variety of factors, including loan availability, interest rates, loan terms, and flexibility of payments. For example, let's say you need to borrow $30,000. As you can see in the chart, your interest rates and monthly payments can vary considerably—but so can the structure of your payments, including when you start and when the final payment is due, as well as your ability to qualify.


Federal loan options

Let's take a closer look at the options for federal student loans.

  • Subsidized Stafford loans—Eligibility for these loans is determined by FAFSA. Typically, they are offered at set amounts for each school year—from $3,500 for the first year up to $5,500 in the third year and beyond—with a lifetime limit of $23,000. As of July 1, 2018, the interest rate is 5.05%. Interest begins accruing upon graduation or leaving school. Standard repayment is a 10-year term, but borrowers can apply for extended repayment options of 10 to 30 years, depending on the amount owed.
  • Unsubsidized Stafford loans—To receive these loans, students must be enrolled in a qualifying degree or certificate program. Interest rates are 5.05% for undergraduate students for the 2018–2019 school year and 6.6% for graduate students, with extended repayment options of up to 30 years, though borrowers must apply and be qualified for extended repayment options such as income-based repayment. Loan limits vary from $5,500 to $12,500 a year for undergrads, with a lifetime limit of $31,000 for dependent undergrads and $57,500 for independent undergrads. Unlike subsidized Stafford loans, interest on the unsubsidized variety accrues from the time they are disbursed, rather than when the student leaves school.
  • Parent PLUS and graduate student PLUS loans—These loans carry a 7.6% fixed rate in the 2018–2019 academic year and are available to graduate students and to parents of undergrads. Unlike Stafford loans, PLUS loans require underwriting, and standards have tightened. To qualify, recipients cannot have an adverse credit history, which includes bankruptcy and unpaid collection accounts and charge-offs. You can appeal a denial by providing added documentation or an endorser. Undergraduates whose parents are denied a PLUS loan are eligible for an additional $4,000 to $5,000 in unsubsidized Stafford loans a year. The bad news is that those who are denied a PLUS loan are unlikely to qualify for private loans. Loan terms can range from 10 to 30 years.





Beyond federal loans

Keep in mind that there are other college financing options beyond federal loans.

  • Private student loans are available, but they typically carry variable interest rates as high as 12%, and they often reset each quarter. Unlike federal loans, most come with a repayment period of up to 20 years, versus 10 to 15 years for federal student loans. Private loans typically are stricter in their selection of borrowers as well. Your credit rate may cause you to pay a higher or lower interest rate, or be denied for a loan altogether. More than 90% of private student loans require a cosigner. Still, private student loans may be an option for some students, especially if they can qualify for a relatively low rate.
  • State-sponsored student loans are loans that have your state's stamp of approval. These loans vary from state to state but in general are designed with the consumer in mind. Interest rates vary, but generally they range from 5.0% to 8.5%. Some states offer attractive features like interest rates that are fixed or the absence of tiered rates that are based on the borrower’s credit score.
  • Home equity lines of credit or home equity loans are another popular option. Home equity lines of credit carry a variable interest rate recently averaging about 6.19%; the rate on home equity loans is fixed, averaging 7.94% as of March 2019, according to in a new window With the equity line, you have the flexibility to borrow money when you need it, and avoid paying interest on money you don't need yet. Home equity loans are generally given by a lump-sum amount in the beginning, and you will have to estimate all your future expenses at that time. However, with both a home equity loan and a home equity line of credit, you use your home as collateral, and risk losing it if you violate the repayment terms.

Before December 2017, you would have been able to deduct the interest on home equity debt. That deduction has been suspended until 2025 as a result of tax reform, so one benefit of financing an education with home equity is off the table.



Consider your options: Highlights of different types of student loans


Type of loan

Who's eligible

Interest rate

Loan limits

When accrual begins

Years to pay

Stafford loans

Determined by FAFSA



After a grace period of 6 months after the student leaves school


Stafford loans

Everyone who files a FAFSA

Undergrads: 5.05%*
Grad students: 6.6%*

Undergrads: $5,000–$12,500/$31,000–$57,500
Grad students: $20,500/$138,500

Begins when student accepts the loan, but payments can be deferred until after the student graduates or leaves school


Parent PLUS
and graduate
student PLUS loans

Those who meet the eligibility requirements and do not have an adverse credit history


Undergrads and graduate students: the cost of the college’s annual tuition and room and board, minus financial aid

Begins when the loan is disbursed, but payments can be deferred until after the student graduates or leaves school



Each state has its own eligibility requirements. Some states require that a student attend college in that state.

Varies by state, but generally from 5.0%–8.5%

Varies by state, creditworthiness, and choice of borrower

Either immediately upon acceptance of loan terms or after the student graduates or leaves school


Private student

Depends on creditworthiness

Varies, but generally from 3.25%–12.0%

Depends on each institution, creditworthiness, and choice of borrower

Either immediately upon acceptance of loan terms or after the student graduates or leaves school


Home equity

Depends on creditworthiness and equity in home

Average 7.94% fixed rate*

Depends on each institution, creditworthiness, and choice of borrower



Home equity
line of credit

Depends on creditworthiness and equity in home

Average 6.19% variable rate*

Depends on each institution, creditworthiness, and choice of borrower



Source:,, FinAid, and Fidelity Investments. *As of 3/21/2019.





Tips for students

For students already enrolled in college or graduating with outstanding debt, here are some tips to understanding, managing, and paying off loans:

  1. Understand the terms and conditions of your loans and be sure to meet your monthly payments.
  2. Take advantage of private and government websites and resources; explore alternatives designed to lower payments, and tuition management assistance programs.
  3. Check whether you qualify for a deduction of your student loan interest when doing your taxes.
  4. Visit the National Student Loan Data SystemOpens in a new window to keep track of your loans and financial services provider.
  5. Opt to repay your student loans via automatic deductions from your bank account, which can help avoid penalties. Repaying student loans automatically not only avoids late fees but may also yield a slight interest rate reduction.
  6. Pay off the highest interest rate loans first to save money in the long term.



Tips for parents

For parents, it's critical to make sure that helping their child pay the college tab won't shortchange their own home equity, retirement savings, or other short- and long-term financial goals. "Parents must do a trade-off analysis and remember they can borrow for college but not for retirement," Ridolfi suggests.


Considering the mounting burden of student-loan debt, most financial experts concur that the best way to reduce the burden is to launch a college savings strategy for your child as early as possible.


The good news is that there are tax-savvy accounts that can help you save. Among them:

  • 529 savings plans, offered by states in conjunction with financial institutions, allow you to save after-tax dollars, but that money can grow tax-deferred and be withdrawn federal income tax-free to meet qualified education expenses. Up to $10,000 per beneficiary may be used for tuition expenses at public, private, or religious elementary and secondary schools in a calendar year, and although the money may come from multiple 529 accounts, the $10,000 limit is aggregated by beneficiary. Unlimited funds from 529 plans can be used to cover tuition, books, room and board, and fees at eligible college-level institutions and graduate schools nationwide. There is no annual contribution limit for 529 college savings plans except for the overall total contribution maximum, which varies by plan but is typically around $300,000. However, to avoid paying federal gift and transfer taxes, an individual can contribute up to $75,000 per beneficiary and a married couple can contribute $150,000 by utilizing 5-year gift-tax averaging.3 (For a more detailed analysis, read Viewpoints on The ABCs of 529 savings plans)
  • Custodial accounts, either Uniform Gifts to Minors Act (UGMA) accounts or Uniform Transfers to Minors Act (UTMA) accounts, offer more investment choices but weigh more heavily on financial aid. They offer limited tax advantages, and the money saved becomes the child's at a certain age, regardless of whether they go to college.
  • Coverdell education savings accounts (ESAs) offer tax-free growth, can be used for college but also for primary education, and are designated for a child’s education expenses, but annual contributions are limited to $2,000 per beneficiary. Still, if you're contributing only $2,000 or less per year, these savings vehicles can be attractive, particularly because they offer a broad range of investment options. (Note: Fidelity does not offer Coverdell ESAs.)


In the end, the more you save, the less you have to borrow. You don't want your newly minted college grad trapped in a debt bubble that could limit their financial future.




Stormy weather for stocks?

While there may be clouds for the market, there are some silver linings.



Key takeaways

  • While second-quarter earnings came in above expectations, the third quarter may well turn negative.
  • Against the backdrop of possibly ongoing valuation pressure (per the Brexit roadmap), I see little upside for stocks until we get past October's seasonal trough.
  • The silver lining is that equity valuations relative to bonds (the equity risk premium) are back to levels seen at the Q4 2018 low, when the S&P 500® index was down 20%.
  • Over the long run, a well-diversified mix of stocks, bonds, and cash should continue to serve investors well.


About the Expert

Jurrien Timmer is the director of global macro in Fidelity's Global Asset Allocation Division, specializing in global macro strategy and active asset allocation. He joined Fidelity in 1995 as a technical research analyst.


On the heels of a solid first quarter, Q2 earnings season has been better than many expected; nevertheless I fear the worst may still be yet to come for earnings growth. While 2019 has been exhibiting the same kind of "V-shaped" to "L-shaped" progression that we saw back in 2016, this year so far has produced a series of higher lows for the estimated growth rate versus the lower lows of 2016.

But when I do the math of the typical progression of the expected earnings growth rate—which shows a decline of 1000 basis points (bps) during the 9 months leading up to the second quarter, followed by a 300 bps bounce during earnings season—I wonder whether I am being too optimistic. Currently, the Q3 estimate sits at −2.3% with 7 weeks to go before the end of Q3. At the beginning of the year, that estimate was +5.7%.


If we apply the typical downward drift, then the Q3 estimate should bottom at −4.3% and then bounce to −1.3%. That would be a new low for this cycle and its first negative print (since Q1 and Q2 both started negative but bounced to positive). And given that both Q1 and Q2 underwent a larger-than-normal drift of around 1200 bps, I find it plausible that the growth rate could finish even lower.


This suggests to me that perhaps the market will remain under pressure until we get past the normal seasonal low in October (i.e., when Q3 earnings season begins). It's easy to see how this could happen by analyzing the 3 components of the market's total return: earnings growth, dividends, and valuation.

The story for 2018 was that the price/earnings (P/E) valuation was getting de-rated (from 19.7x in January to 13.7x at the December low) at the same time earnings growth was accelerating (from +12% in 2017 to +22% in 2018). The net effect was a 6% decline in the S&P 500® for the year. For 2019, this dynamic has reversed: Earnings growth has been slowing (from +22% to +3% or lower) while P/E multiples are up. But if earnings growth is heading even lower and valuation multiples contract from here (following the Brexit roadmap), by my calculation it will be near mathematically impossible to avoid a negative-return outcome for the year, or at least the third quarter.


Will markets experienctgreat or lesser pressure in the months ahead?

The data in the chart is described in the text.


YOY: Year over year. Source: Fidelity Investments, Bloomberg Finance, L.P.; weekly data as of July 31, 2019. Past performance is no guarantee of future results.


Meanwhile, earnings are not the only storm clouds out there. Trade disputes remain front and center for the economy as well as the markets, especially now with slowdowns wearing on many major foreign countries. It's difficult to sugarcoat the possible, unintended consequences of a Chinese currency devaluation weakening past the politically sensitive 7.0 yuan/USD level. This always seemed a worst-case nuclear-option type of action on China's part, and yet all of a sudden, here we are.


With the S&P 500 down 7% from its recent high of 3020 and the forward P/E still a relatively high 16.8x, the equity risk premium (defined here as the earnings yield minus the bond yield) has reached 4.5%. The premium is now as high as it was at the December 2018 bottom when the S&P was down 20% from its 2018 high (with the forward P/E a mere 13.7x), or about twice what it was a year ago.


All of this is compliments of a tumbling bond yield. It's certainly a good reminder that valuation should always be considered within the context of interest rates and that perhaps equities have de-rated more than some will give them credit for.


That leads me to be hopeful that perhaps the US market is further along the Brexit roadmap than meets the eye. To recap, my Brexit roadmap traces the effects emanating from the June 2016 UK referendum setting up the country's break from the EU. In the 3 years since, the UK stock market has moved sideways while earnings have grown 30% and the forward equity P/E has fallen from 16x to 12x. For the US analog, that would suggest a valuation de-rating from 19.5x (Jan 2018) to 15x (August 2019). We are halfway there.


Another silver lining for investors is diversification: Over the long run, a well-diversified mix of stocks, bonds and cash should continue to serve investors well.


The Brexit Roadmap: Charting a course for the United States as well?

The data in the chart is described in the text.

Source: Fidelity Investments, Bloomberg Finance, L.P.; weekly data as of August 16, 2019. Past performance is no guarantee of future results.


Will this continue? I don't know. Diversification does not ensure a profit or guarantee against a loss. But with the federal funds futures curve now pricing in 4 more cuts (heading down to 1%), and with about $16 trillion worth of global debt trading at negative yields (compared with a mere $13 trillion just a few months ago!), I find it completely plausible that yields on US 10-year Treasuries could fall below the 2016 low of 1.32% and end up somewhere around 1%.


So, can yields actually go much lower?


I think it's quite possible yields could continue downward, but I also think it would require a full easing cycle on the part of the Fed. We tally nearly $16 trillion of negative-yielding debt out there—up from zero (indeed, unthinkable) just 10 years ago and rising fast. What if the share of global debt trading at negative yields continues to expand as the world economy continues to slow? What if a few years from now, the amount were to reach $20 trillion or even 25 trillion? Where would our 10-year Treasury yield be then? 2%? 1%? Zero?


The thought is not all that implausible, in my view, given that the FTSE World Investment Grade Bond Index (WorldBIG®) ex-US already yields close to nothing—and its yield could well go lower if the world economy keeps slowing and central banks everywhere keep easing and global QE (quantitative easing) resumes. Heck, if Greek bonds can go from 12% to 2% in 5 years' time, what's to stop US Treasuries from falling from 3% to 1% or all the way to zero?


Bonds have done a capital job protecting against equity risk

The data in the chart is described in the text.

US Agg; Bloomberg Barclays US Aggregate Bond Index. Fidelity Investments, Bloomberg Finance L.P.; daily data as of Aug. 9, 2019. It is not possible to invest directly in an index. All indices represented are unmanaged. All indices include reinvestment of dividends and interest income unless otherwise noted. Index performance is not meant to represent that any of Fidelity mutual fund. Past performance is no guarantee of future results.


As I see it, for US yields to decline further, all we need is a Federal Reserve easing cycle that weakens the dollar and changes the relative shape of the basis swap* curve to make it once again attractive for foreign investors to buy Treasuries on a currency-hedged basis. (A basis swap is a contract to exchange cash flows based on different variable interest rate references and may also involve different currencies as a way to accommodate liquidity needs.) They haven't done so lately because the US 10-year is yielding -0.60% on a hedged basis, below the yield of German bunds (−0.38%) and Japanese government bonds (−0.15%).


How can we know where yields go from here? Maybe it's as simple as demography. I did a simple exercise comparing the buildup of negative-yielding debt with the percentage rate of change of the 65+ US age cohort. The similarities should come as no surprise: The demographic tidal wave sweeping across large swaths of the world's population is bound to have an effect on interest rates as more and more of society shifts from solving for growth to solving for income.

For debts, demography = destiny: Yes or No?

The data in the chart is described in the text.

What will a decline in Treasury yields to, say, 1% or less due to equity valuations, especially those "bond proxy" equities that offer a compelling alternative to debt instruments? I find it no accident that both the secular growers and the stable, bond-proxy growers have been leading the market in recent years. If rates keep falling, this odd couple of market leadership may well continue. That suggests to me that the generational lows seen in the relative performance of value versus growth equities might well be a value trap for now.


Given that the relationship between the yield of a bond and its “P/E” (its price-to-yield or price-to-cash flow) becomes increasingly non-linear as yields approach zero (aka convexity), one has to wonder if the path for some equity valuations might also become non-linear if bond yields end up declining much further. For instance, the “P/E” of a 5% bond is 20x, and the P/E of a 2% bond is 50x. A bond yielding 1% has a P/E of 100x; a bond yielding 0.1% has a P/E of 1000x.


Given the above, will the disappearance of bond yields be the thing that solves the riddle of how we can have a stock market that promises double-digit returns and mediocre returns at the same time? The double-digit promise derives from the analog of past secular bulls (see my report from last month); the projection for mediocre returns stems from the strong inverse correlation between the 10-year CAPE (cyclically adjusted P/E) and the 10-year forward equity return.*


If ultra-low yields force more and more investors into alternative sources of income—especially equities of companies that pay stable dividends (or at least buy back their shares)—will investors increasingly use price-to-cash flow instead of price-to-earnings to value their investments? I am not predicting this shift, but it also wouldn't surprise me in the least. As I pointed out last time, on a price-to-cash-flow basis, the S&P 500 is technically cheap versus history (in the 28th percentile), whereas measured by the 10-year CAPE, the market has hit "nose-bleed" levels (92nd percentile).


From the 1960s through the 1990s, equity and bond P/Es exhibited a tight correlation. This relationship served as the foundation of the so-called Fed Model, on which former Fed Chair Alan Greenspan relied heavily and which foreshadowed the 1987 stock-market crash. The Fed Model simply tracked the spread between the S&P 500’s earnings yield and the 10-year Treasury yield (or, inversely, the ratio of the equity P/E to the bond P/E). Beyond certain upper and lower bounds, the spread was taken to signal that stocks were cheap or expensive, but historically the spread always kept to a mean-reverting range.


The model stopped working when the market entered the deflationary era of the 2000s, and today the 48x P/E on long-dated Treasuries far outstrips the measly 18x P/E multiple on the S&P 500, or even the 27x calculated using the CAPE.


What if the bond P/E rises to 100x or 500x? What will that do to the equity P/E? Sorry, I don't know—but it's worth thinking about. If the equity P/E multiples of those sectors, styles, and factors that generate a compelling cash flow expand in order to keep up with the rising bond multiple, then maybe that will form the narrative by which, a decade from now, we can all explain how the market just kept on going up and up and up despite the myriad reasons why it shouldn't have.


One major counterpoint to that line of thinking is the simple fact that we already have zero or negative rates on bonds in Japan and parts of Europe, and their equity markets have hardly gone convex or parabolic. The MSCI Japan Index has a forward P/E of 12.7x, and MSCI Europe is at 13.7x. So, no valuation bubbles there, even though, compared with the United States, their rates are lower, their age waves more advanced, and their dividend yields higher (2.5% in Japan and 3.8% in Europe versus 1.9% in the US). It's a point that's difficult to dispute.


The only thing I can think of in terms of why the US cycle might be different is that Europe and Japan have pension systems whereby most pensioners simply need not rely on their own asset allocation to solve for their retirement. The onus to deliver pensions is on the State, not on the citizens themselves. Moreover, the European and Japanese systems also are very bond-centric: If a yield shortfall for those pensions were to develop due to zero or negative yields, I think it unlikely that the State would load up on equities to make up the difference.


The US is a different story: While the defined-benefit system is not totally dead, Americans for the most part must fend for themselves via their 401(k)s and IRAs. So, if bond yields run dry here, I believe it at least theoretically possible that American savers might add more (income-generating) equities to their portfolios in order to make up the difference. I have no idea whether such a dynamic would be big enough to create a different outcome in the US versus Europe and Japan, but it's something worth considering. Of course, in terms of secular growers, US sector weights also are quite different from those in Europe and Japan, so that too could prove a swing factor in terms of valuation. Indeed it already has.


One final point: It's interesting to me that the demo-graphic tidal wave currently underway peaks in 2026. That is the same year in which the secular bull-market analog that I have displayed so many times also peaks out, based on the experience of 1982–2000 and 1949–1968. Coincidence? It makes one wonder whether the former, the wave, can become the narrative for the latter.


As I said in my last report, I don't know any better than anyone else what the coming years will bring or whether or not we are in a secular bull market. But I am convinced of one thing: If this is a secular bull and we indeed have another 5-plus years of strong valuation-driven returns ahead of us, it likely will be because of the yield phenomenon described herein.




Do you really need a bank?

The answer is not as clear-cut as it once was. Consider the alternatives.



Key takeaways

  • Your brokerage firm may offer many of the same services you can find at a bank. Plus, it may be a convenient way to manage your money—in one place.
  • Credit unions also offer banking services—with potentially fewer fees than banks.
  • Banks are still good for loans and most have convenient locations for in-person transactions, but mobile banking has made the brick-and-mortar bank less vital.



Stopping by the local bank branch used to be part of most Americans' everyday routine, like picking up milk and bread at the grocery store. But changes in technology have made banks less central in many people’s lives. Plus, banks now have more competition when it comes to basic banking services.


In addition to online banks, community banks, and credit unions, many brokerage firms have started offering their customers a range of financial services that are similar to those found at conventional banks—and Fidelity is one of them. "Brokerages have come to believe they can offer many of the services a bank would offer, either directly or through third-party arrangements," says Erik Lind, vice president of cash management products at Fidelity Investments. "These include the ability to write checks against brokerage accounts and link debit cards to those accounts for easier access via either ATMs or point-of-sale transactions, or through brokerage accounts that have been set up to act like checking accounts."


"Some brokerage firms have also introduced enhanced cash management serv

ices, including mobile deposit and bill payment functionality, to better compete with banks," says Lind.

Banks have expanded their services too. Services such as retirement planning, asset allocation, and managed accounts—all previously available primarily at brokerage firms—can now be found at some banks.


You may not even miss your bank

Fewer people make trips to the bank these days. Indeed, it's hard to remember when it was necessary to visit a branch to perform a simple transaction like a funds transfer. Now most transactions, including mobile check deposits, can be completed with the tap of a finger or a click of a mouse. As a result, banks across the country are closing branches, citing the high costs of operating those branches and the decline in traffic from customers at their branches.


Banking services offered by brokerage firms

A decade ago, the financial crisis brought challenges and opportunities to the financial services industry. "Brokerage firms saw a great opportunity to look at their services and find ways to close the gap with banks," says Lind. Now you can get some bread-and-butter banking services at the same place you hold your investments accounts.


FDIC insurance. Bank accounts are FDIC insured up to $250,000.1 But at some brokerage firms (Fidelity included), it is now possible to have uninvested cash balances swept to multiple banks, making those balances eligible for well over $1 million of FDIC insurance coverage.2 "If you wanted to do that directly at a bank, you'd have to set up differently titled accounts or have your funds literally placed in different banks," says Lind.


"A more convenient way to gain the expanded coverage may be to open one account at a brokerage provider that can automatically cascade your assets throughout its bank network coverage, rather than having separate deposits in a bank or multiple banks," says Lind.


Cash management services. Brokerage firms don't have as many branches as most major banks, so in the days before online banking, it was difficult for them to offer services that required initial branch visits, such as direct deposit or bill payment. Now that online and mobile banking is widespread, some brokerage firms offer a wide range of services, including direct deposit, mobile deposit, and online and mobile bill payment, as well as check writing capabilities and debit cards linked to brokerage accounts, most of which previously were solely the domain of banks.


Credit cards linked to investment accounts. Some brokerage firms partner with third parties to offer their customers credit cards that may provide a boost to an individual's investment account. For example, clients using a brokerage-linked credit card might accumulate cash rewards that are deposited in their retirement or investment accounts.


Relief from fees. Fees can add up. The average monthly checking account maintenance fee is about $5.57. ATM fees for noncustomers to use bank ATMs average $4.68, according to Bankrate.3


There are ways to get around bank fees—not all checking accounts charge maintenance fees or they are waived after jumping over some low hurdles such as setting up direct deposit.


You can also shop around for low or no-fee options like those offered by online banks, community banks, credit unions, and brokerage firms where you may find debit cards, checkwriting, bill pay services, and reimbursement of ATM fees.


Trouble-free transfers to brokerage accounts. Some brokerage firms allow their clients to link checking and other banking accounts with their investment accounts. This arrangement simplifies the process of transferring money in and out of brokerage accounts—giving clients access to their cash when they need it, or enabling them to add to their investment portfolio quickly and easily. Moreover, consumers can arrange for brokerage assets to cover overdrafts on checking accounts, potentially avoiding steep fees.


Traditional banking features can even be added to brokerage accounts—letting you write checks, pay with a digital wallet, or pay bills straight from your investment account.


Some benefits of banks

Despite the expanded offerings of brokerage firms, banks provide some services that are difficult to find elsewhere. These include:


Availability of personal loans. Most notably, businesses and consumers looking for personal loans are typically best off heading to a bank. "Brokerage firms generally are not in a position to provide this type of consumer lending," says Lind. This means any consumer who needs a mortgage, car loan, home equity loan, or personal loan is likely to require the services of a traditional bank or a specialty online provider of these lending products.


A way to establish credit. If you're trying to establish credit or get a loan with a scarce credit history, having an established banking relationship with the lender may help you get a loan. It's not a sure thing, of course, but it could be one mark in your favor. A good credit record means that you have a better chance of qualifying for a loan, and possibly getting a better (meaning lower) interest rate on a loan. This means that you may be able to pay less money (in interest) for the amount of any money you have to borrow.


A sense of comfort and tradition. Many bank customers are just more accustomed to walking into a bank or using their bank's online services. Some people may feel more comfortable with bank services and like having their money in one place. Other people are just reluctant to change their banking practices, or they may value a nearby, in-branch relationship that may be easier to find at a local bank.

Plus, banks with local branches do usually offer some convenient services to customers, like having a notary public on staff and free cashier's checks.


Be sure to weigh the pros and cons of any change

So do you still need a bank? Like most financial decision-making, there is no one right answer, just the answer that is right for your particular needs and circumstances. Before making any decision, it's important to weigh the pros and cons. The changes in the financial services industry have brought more options to consumers, which means you get to choose the banking relationship that works for you.




Ready to retire? You still need a budget.

It's important to start your retirement with a spending plan that works for you.



\Key takeaways

  • Try to match your essential expenses to guaranteed sources of income.
  • Limit withdrawals from retirement savings accounts to 4%–5% in your first year of retirement,then adjust for inflation in subsequent years.
  • Consider consolidating accounts at a trusted provider.


Making a budget may not be the first thing you look forward to in retirement, but it's one of the most important things to do to start your retirement on the right path. Along with an income plan that can deliver a steady "retirement paycheck" and an investing strategy that allows a portion of your nest egg the chance to grow, a realistic budget—based on all the sources of income you have coming every month—is an essential building block of retirement.


If you're ready to begin putting together a retirement budget, here are some tips to help.


Think big picture

For many people, the budgeting process stalls before it really gets started. That's often because they worry about the details of their discretionary (nice-to-have) spending instead of looking at the big picture. Start by understanding your essential (must-have) expenses and how you can use guaranteed sources of income, like Social Security, pensions, and annuities, to pay for them. (See the "Essential expenses" section below.)


Then create your discretionary budget by focusing on categories of spending—such as travel, gifting, and entertainment—rather than trying to account for every dollar you'll spend. A good practice is to match these nice-to-have expenses with income from individual retirement accounts (IRAs) and other tax-deferred retirement savings accounts.


Get organized

Plan ahead and think about the life you want to live in retirement, based on what you can afford. You need to know the details of your recent spending patterns, and determine whether your overall spending will go up, go down, or stay the same in retirement.


To start, tabulate your average monthly expenses like cable, telephone, and electric bills and know how much money is coming in versus going out. If you use credit cards, go online and look at year-end summaries to see where you spent the most money last year. Do the same with online bank statements. Next, identify your ongoing monthly bills and determine whether you need to continue all these services. Then look through your past bills and online bank statements to identify work-related expenses that you may no longer have to pay now that you're retired. Lastly, categorize expenses into "essential" and "discretionary" (see below).


Essential expenses

Cover essentials first. Health, comfort, and security are among life's most important priorities, so you'll want to make health care, housing, transportation, and food your budget priorities.


Health care: Planning for health care costs can be especially daunting with estimated costs for an average 65-year-old couple retiring in 2019 hitting a total of $285,000 (in today's dollars) over their entire retirement period. Even if you're covered by Medicare and an insurance plan from your former employer, supplemental premiums and out-of-pocket costs continue to rise.1


Housing: If your home is paid for, good for you! But don't forget to add utilities, maintenance, and possibly larger home repairs. A good rule of thumb is to budget at least 1 % of your home's value for annual maintenance. So, if your home is worth $400,000, then budget approximately $4,000 per year for standard repairs, general upkeep, or accessibility upgrades.


Transportation: No longer having commuting costs is a big bonus of retiring, but your transportation costs won't drop to zero. Most people don't retire to sit around the house, so remember to include the cost of gas or public transportation for trips to activities, as well as vehicle maintenance expenses. If you are considering buying a new or used car, add that expense too.


Food: Although you may not be eating out at lunch with colleagues, overall expenditures on food will likely remain constant. Now that you're retired, it might be a great time to do some fun things like taking cooking lessons or entertaining for friends and family.

The table illustrates the percentage of total income the average household spends on food, housing (including utilities), transportation, and health care.


Note: The table illustrates the percentage of total income the average household spends on food, housing (including utilities), transportation, entertainment and health care. Data are based on the 2017 Consumer Expenditure Survey by the Bureau of Labor Statistics (BLS). From the survey, reported household income and expenditures were aggregated in the 5 categories. Aggregated spending amounts were then divided by the total reported expenditures to derive the average expenditures for each cohort. The percentages are the results of cohort average expenditures by average total income. Total household income by age segment may vary from year to year, resulting in higher or lower percentages of spending per category.2


Discretionary spending

Once you have accounted for your "must-haves," you can begin budgeting for discretionary items, such as dining out, going to the movies, and those bucket-list adventures you've been dreaming of.


Travel: How you budget for travel will depend on the types of trips you're contemplating—weekend getaways, long vacations, or visits to family and friends. For short jaunts, you can build a monthly expense into your budget, putting the money you don't use into a pool for spending later. If you are planning for longer vacations, add a vacation fund to the budget.


Entertainment/dining out/gifting: You probably already have a good idea of how much it costs to go to the movies and dine out, but many people forget to include money they use to buy gifts for family and friends. If your budget allows for it, consider larger gifting priorities—such as giving money to future heirs to minimize inheritance taxes or contributing regularly to charities.


Stick to your income plan

A well-designed retirement income plan should be backed by an investing strategy that provides opportunities for your assets to generate earnings and helps your income keep pace with inflation. But investment returns will vary, and that, along with unexpected expenses, may require you to build some flexibility into your budget. One solution is to express your discretionary spending as a range. That way, you can choose to put aside unspent money in months when your costs are at the bottom end of the range and use it during months when your discretionary spending may be higher.


Tip: Fidelity suggests limiting withdrawals from retirement savings accounts to 4%–5% in your first year of retirement, and then adjusting this number in subsequent years.


Keep it simple

Remember why you retired—to have fun and do the things you never had time for when you were working! One way to simplify may be to consolidate your retirement accounts with a trusted financial services provider, which enables you to organize your income, investing, and spending in one place while potentially reducing fees.


If you need help with budgeting or reviewing your retirement earnings, consider working with a financial advisor. Or, if you are more of a DIY person, check out Fidelity’s online budgeting tools.





Art of Accounting: Rip Van Winkle effect for small CPA firms

By Edward Mendlowitz


Last month a colleague called asking me what I knew about a certain brand of workflow software. He said he was thinking about using it for his tax calendars.


Before I told him what I thought, I asked him a number of questions and found out his office wasn’t paperless, did not use smart scanners for tax preparation, was using QuickBooks Desktop for his client services — which was the main part of his practice along with an extensive number of 1040s — and he used a convoluted Excel worksheet for his tax calendars, thus necessitating the call.

Two primary issues came out of our discussion that I want to share and address here.


1. He was running a successful practice as a sole owner with a dozen employees. He was happy, made quite a bit of money and had low turnover. With that in mind, I did not want to suggest anything that would upset his applecart but felt that I could somewhat bring him up to date.


2. He seemed unaware of the many changes that have occurred in the accounting business over the last 20 years. It’s almost as if he fell asleep and just woke up, similar to Rip Van Winkle’s situation. My thought was whether it was necessary or important for him to adapt and, if so, how to go about it.


I believe it is important to change, adapt and grow. True, he was successful, but he was in his mid-40s and not even close to thinking about retiring, with many more years ahead of him. Changes occur slowly until they become overwhelming if they are not recognized and then there might not be much of a choice.


I am reluctant to tell anyone who is successful that they need to change, but feel that by him not adapting, he could end up with a declining practice. At some point that could cause more consternation than the inconvenience of making gradual changes as he is able to make them. I don’t need to report the litany of changes that have taken place over the last 20 years.


Things are changing rapidly. At some point they could create a wave too strong to swim against and the result would not be good. Today is a fine time to appreciate all the good things we have and enjoy and do, creating a desire to maintain the status quo. Today is also a fine time to start to make small changes to move away from yesterday and into tomorrow. Here is what I suggested:


1. Rather than start with the workflow software — which would keep track of his tax calendars, but also provide a fully integrated practice management system — I suggested he start with making his firm paperless. That is the first step. If he started now, he could be fully functional and ready when tax season starts. I told him not to spend time transferring any old or existing files, but to start with all new work.


2. He should consider smart scanning software for next tax season. He should contact his tax software company and find out what software would work with their system and ask for the names of a couple of practitioners in his area he could speak to about it.


3. The third thing he could do would be what he called me about. Assuming the first two things are working well, he could then get the workflow software after tax season, say around July 1. I also suggested he look at a couple of other products and speak to practitioners who are using them.


4. He should consider switching to QuickBooks Desktop Online, but only after everything else is working smoothly, possibly in two years. This is how he makes his living and I do not want him to risk screwing it up until everything else is in place and he’s comfortable with it, so this would be the last step. Note that QB Desktop Online is not the same product as QuickBooks Online, and from the feedback I have gotten, the desktop version seems to work better for many smaller practitioners.


Things change, and change can be upsetting and unsettling. I think this is a reasonable plan that would not be too disruptive and could make his practice run smoother. Each of the first three things I suggested has proven to be effective in managing a practice. He would not be venturing into untried grounds.


Don’t be a Rip Van Winkle!




Anybody Can Itemize Their Deductions. But Most Don’t Want To

By Robert McClelland


It is sometimes said that the Tax Cuts and Jobs Act of 2017 (TCJA) ended the ability of millions of taxpayers to claim itemized deductions, and that itemizing is now only for the rich. But, while the TCJA did make it more beneficial financially for many filers to take the standard deduction, it did not prohibit anyone, no matter their income, from choosing to itemize. 


The choice between itemizing and claiming the standard deduction is no different than it was prior to the TCJA, and any taxpayer can itemize deductions when filing their income taxes. However, after the TCJA, many more taxpayers pay less in taxes by taking the standard deduction rather than itemizing. In addition, using the standard deduction makes it possible to lower their taxes without having to keep track of itemizable expenses through the year.


From the inception of the modern individual income tax system in 1913, taxpayers have been able to deduct certain expenses from their taxable income. While this may have required burdensome recordkeeping (no credit card statements or computer spreadsheets a century ago), only people with very high incomes owed taxes. That changed with World War II, when the income tax was extended to most US households. Because so many people had to start keeping records to itemize and claim deductions, Congress simplified tax filing in 1944 by introducing a standard deduction.


People could then choose to itemize or to claim the standard deduction. This not only made filing easier, it also allowed those with few deductible expenses to use the standard deduction and reduce their taxable income.


Over the years, the standard deduction went through many changes, and by 2017 the standard deduction was $6,350 for a single filer, $9,350 for a head of household, and $12,700 for a married couple filing jointly. Thus, single filers with less than $6,350 in itemized deductions were better off taking the standard deduction both because it is simpler and it lowered their taxable income. As a result, about 70 percent of households chose the standard deduction while about 30 percent of filers itemized.


The TCJA changed that calculus for many filers. For 2018, it raised the standard deduction to $12,000 for single filers, $18,000 for heads of household and $24,000 for married couples filing jointly. It also capped at $10,000 one of the most commonly used itemized deduction, the one for state and local taxes. As a consequence, the Tax Policy Center estimates that in 2018 only about 19.3 million filers — or about 13 percent— will choose to itemize.


But this doesn’t mean that other taxpayers can’t itemize. They can, but they would be increasing their taxable income and need to keep records of their deductible expenses.




AI for everyone, including accountants

By Vinay Pai


Most accountants probably don’t dream of becoming artificial intelligence experts. But the truth is that every accountant can now benefit from AI in their practice — even those who don’t know the first thing about software engineering, data science or Python code. With today’s off-the-shelf AI solutions, accountants can work smarter and deliver better service to their clients.


Traditionally, implementing AI has required a level of knowledge and resources that are beyond the reach of most accounting firms. Whether it’s selecting an AI platform, creating algorithms or training the AI, getting up and running with AI has always demanded a high level of technical acumen.


But this is changing — accounting professionals today no longer need to be tech geniuses to take advantage of AI. Big Four accounting firm EY, for instance, is now teaching algorithms to think like an auditor and detect fraudulent activity among hundreds of millions of entries.


Many cloud-based software applications commonly used by accountants are also leveraging a certain degree of AI. For example, Expensify now has an AI-powered audit and compliance tool that automatically reviews employee expense receipts for errors and policy compliance, flagging questionable expenses for further scrutiny.


Additionally, there is accounting software that can automatically capture and enter all the required data from any type of invoice and start the bill-creation process as soon as the invoice hits your inbox.


The AI-driven app will keep track of the vendor name, invoice number, due date and amount due. It will even complete all the categorization in your general ledger with no human assistance. Plus, the AI will get smarter the more you use it, so ultimately the only point at which you’ll need to step in is to review and approve the process. That means you can focus on more strategic tasks that accelerate business growth.


There are also off-the-shelf AI tools like that are helping to democratize intelligence for everyone. These tools can be especially helpful to accountants because they are already sitting on a treasure trove of data that includes customer databases, CRM leads and financial models. This data is typically spread across various silos, but with a good AI tool, accountants can meld all this information into a single data lake.


This is not a revolutionary concept. But what is new is that you can now buy a third-party AI and machine-learning platform and use it with relative ease to glean insights into your business — without having to write a single line of code. The AI platform does all the heavy lifting for you.


So what does this mean if you’re an accounting professional? It means you can more easily drive insights and get the data you need to make the best decisions. Say you want to know who your best bookkeepers are and who are not so good. You can quickly pull the data to see who has the highest error rates versus who is most efficient and gain valuable insight as to how your business is operating.


Here’s another interesting use: As an accountant, you want to be in a position to provide insights to your clients. Your clients want to know how the economy will hold up, what sectors are growing, if they should grow their business right now or if the market is overheated. All of these tasks are eminently doable with data science. You can look across the portfolios of your various clients and see how they’re doing, compare what you see Oo other macroeconomic data points, and start making the sort of forecasts and predictions that are invaluable to your clients.


Accountants can also use AI to determine who their best clients are, who requires a lot of hand-holding and who are on a fixed-priced retainer costing you money. Going a step further, AI can illuminate the common attributes of those suboptimal clients and warn you when a potential new client has the same attributes.


AI is no longer the stuff of science fiction; it's here and here for everyone. In fact, AI is critical to the future of the accounting industry. Take bookkeeping, for example. Accounting organizations are having a hard time finding and hiring bookkeepers in this economy of low unemployment. AI can automate much of the bookkeeper’s data-entry work. This means people who are now doing that lower-level work can move up a rung and start to provide more strategic analysis.


The beauty of AI for accounting firms is that it can take those manual-entry jobs and transform them into client-facing assets that deliver key insights. These people might not have an accounting degree, but they can still deliver data-driven insights by using AI tools.


"How am I doing on cash flow this month?" "Anything I should be worried about next month?" "Where will I be at the end of the quarter?" These are all insights that can be extracted with the help of AI tools. Accounting firms can even use AI to create forecasting models for their clients and really set themselves apart from the competition. For example, say a client wants to open a second location. AI can dive into your aggregated client data and start to run different scenarios for the client to determine whether a second location is feasible and, if so, where the best spot is to open that new location.


If I’m an accountant using AI tools, I can implement a risk and fraud model for all my new customers. I can figure out if they’re a good risk or not and whether I should auto-approve them or ask for more information. From a risk-reduction perspective, an AI tool can be transformative.


The bottom line is that intelligence is being democratized. That means it’s easier than ever to get started with AI and drive real value for your business.




Tax dodgers’ ‘phantom’ cash makes up 40% of foreign investment


Almost 40 percent — or some $15 trillion — of the world’s foreign direct investment is “phantom capital” designed to minimize the tax bills of multinational firms, according to a study published by the International Monetary Fund.


Such investments — which are now equivalent to the combined GDP of China and Germany — have surged about 10 percentage points in the past decade despite targeted global attempts to curb tax avoidance, an IMF and University of Copenhagen study found. The capital typically passes through empty corporate shells that have no real business activity.

“FDI is often an important driver for genuine international economic integration, stimulating growth and job creation and boosting productivity,” the report said. But phantom capital is “financial and tax engineering” that “blurs traditional FDI statistics and makes it difficult to understand genuine economic integration.”


Almost half of the world’s phantom capital is hosted by Luxembourg and the Netherlands, according to the report, with just 10 economies holding more than 85 percent of such investments.


“Luxembourg, a country of 600,000 people, hosts as much FDI as the U.S. and much more than China,” the report said. “FDI of this size hardly reflects brick-and-mortar investments in the minuscule Luxembourg economy,” whose $4 trillion in FDI comes to $6.6 million a person.


“Unsurprisingly,” the study found, an economy’s exposure to phantom FDI increases with the corporate tax rate.




IRS offers tax relief to expats who renounced U.S. citizenship

By Michael Cohn


The Internal Revenue Service outlined new procedures Friday to allow some expatriates who have relinquished their U.S. citizenship the chance to comply with their U.S. tax and filing obligations and in turn qualify for relief from back taxes, penalties and interest.


The Relief Procedures for Certain Former Citizens will apply only to individuals who haven’t filed U.S. tax returns as U.S. citizens or residents, owe a limited amount of back taxes to the U.S. government ($25,000 in the past six years), and have net assets of less than $2 million. Only those taxpayers whose previous compliance failures were non-willful can take advantage of the new procedures, according to the IRS. Many in this group may have lived outside the U.S. most of their lives and not been aware that they had U.S. tax obligations.


The relief comes nearly a decade after passage of the Foreign Account Tax Compliance Act, or FATCA, which was included as part of the HIRE Act of 2010. FATCA required foreign financial institutions to report the assets of U.S. taxpayers to the IRS, or else face penalties of up to 30 percent on their income from U.S. sources. The controversial law prompted many foreign banks to close the accounts of their U.S. expatriate customers and made it difficult for many of them to find banking services. Some of them had lived abroad nearly their entire life and were unaware they were U.S. citizens. The law led to a steady uptick in U.S.-born citizens who lived abroad renouncing their citizenship, but the IRS still expected them to pay taxes on the money they earned previously.


Eligible individuals who want to use the new relief procedures are required to file outstanding U.S. tax returns, including all required schedules and information returns, for the five years preceding and their year of expatriation, according to the IRS. Provided that their tax liability doesn’t exceed a total of $25,000 for the six years in question, the taxpayer will be relieved from paying U.S. taxes. The purpose of the new procedures is to give relief to certain former citizens. Individuals who qualify for the procedures won’t be assessed penalties and interest.


The IRS said it is offering the procedures without a specific termination date, but it will eventually announce a closing date prior to ending the procedures. Individuals who relinquished their U.S. citizenship any time after March 18, 2010, the year FATCA was enacted, are eligible as long as they satisfy the other criteria of the procedures.


The IRS cautioned that the procedures are only available to individuals. Estates, trusts, corporations, partnerships and other entities can’t use the procedures.


The IRS intends to host an online webinar in the “near future” providing more information and practical tips for making a submission to the Relief Procedures for Certain Former Citizens. However, it urged caution before taxpayers decide to renounce their citizenship.


“Relinquishing U.S. citizenship and the tax consequences that follow are serious matters that involve irrevocable decisions,” said the IRS. “Taxpayers who relinquish citizenship without complying with their U.S. tax obligations are subject to the significant tax consequences of the U.S. expatriation tax regime. Taxpayers interested in these procedures should read all the materials carefully, including the FAQs, and consider consulting legal counsel before making any decisions.”




Does your client need foreign qualification to conduct business in another state?

By Nellie Akalp


If you have clients who want to do business in another state or multiple states, they may need to file for "foreign qualification" (sometimes called “Certificate of Authority”).


Let’s take a moment to explore how this can affect them from legal and tax standpoints — and what they need to do to become foreign qualified in a state.


When must a company foreign-qualify?

If a company will conduct business in any states beyond where it has incorporated or formed an LLC, it must foreign-qualify the business in those new states. Otherwise, it cannot operate in them legally.


Keep in mind that selling products or services to customers in another state doesn’t necessarily mean a company must foreign-qualify. For example, a freelance web designer who formed an LLC for her business in North Carolina probably would not need to file a foreign qualification in other states where she is providing her services. This assumes she is performing most of her work online from her home state and does not frequently meet clients in the states where they are located. In this scenario, getting revenue from other states doesn’t mean the business is operating in those states.


Questions clients should ask themselves

If your clients answer “yes” to any of the questions below, they may be required to file a foreign qualification with a state:

  • Does my LLC or corporation have a physical presence (e.g., an office or retail location) in the state?
  • Do I or someone who works for my company regularly conduct in-person meetings with customers in the state?
  • Does a large portion of my company’s revenue come from the state?
  • Did I apply for a business license in the state?
  • Do any of my employees work in the state?
  • Do I have a bank account in the state?


Examples of when businesses need foreign qualification

  • A restaurant registered and operating in Pennsylvania wants to expand into Ohio. (The company must foreign-qualify the business in Ohio.)
  • A company incorporated in Wyoming but is physically located in Oregon. (The company must foreign-qualify the business in Oregon.)
  • A company is incorporated in Texas. One business partner lives in Texas, and the other partner lives in Florida. Recently, the partner in Florida has been acquiring most of the company's clients, meeting with them in that state. (The company must foreign-qualify the business in Florida).


Note that the above questions serve as a great starting point and the examples I’ve shared shed some light on the subject. But sometimes It can get tricky to determine when a business must pursue foreign qualification. Your clients should seek the guidance of an attorney to make sure they know for certain.


How foreign qualification affects business compliance and taxes

Businesses that foreign-qualify in a state must fulfill the reporting and filing requirements that the state requires of foreign-qualified companies. For example, the company will need to designate a registered agent in the states where it has foreign-qualified. Still, foreign qualification is simpler to maintain than the alternative of forming a new domestic corporation or LLC in every state where the company wants to conduct business. For example, rather than writing bylaws and appointing a board of directors in each state, what is in place in the business’s home state covers the company in the states where it is foreign-qualified.


A foreign-qualified business must pay state or local income taxes, franchise tax, sales tax and possibly other fees according to each state’s laws.


How to foreign qualify

Businesses that must foreign-qualify in a state need to file an application with that state's Secretary of State office. Usually, they can find the forms online and either complete them on their own, have an attorney prepare them, or, to ensure accuracy and keep costs down, ask an online document filing service to handle the filing.


Where can clients find more information?

Each state provides information about their foreign qualification requirements on their Secretary of State’s (or comparable organization’s) website. An attorney can help your clients determine whether they need to foreign qualify and explain the compliance requirements for each state. And of course, you can help your clients understand the tax implications. You might even consider taking your ability to assist clients one step further by expanding your services to include preparing and submitting online business filings.


The bottom line: By doing their homework and getting expert advice, your clients can rest assured they're foreign-qualified where needed and feel confident they've handled the process correctly.




IRS may be overlooking billions of dollars worth of false claims for carryforwards

By Michael Cohn


The Internal Revenue Service isn’t doing enough to address billions of dollars worth of potentially erroneous carryforward tax credits and deductions claimed by businesses, according to a new report.


With a carryforward credit or deduction, a taxpayer claims the unused portion of a tax credit or deduction on a future year’s tax return. The credit reduces the amount of a business’ tax liability, while a carryforward deduction reduces a company’s taxable income. Approximately 2.5 million tax returns for 2015 included claims for carryforward credits, for a total of $81.9 billion, according to the report from the Treasury Inspector General for Tax Administration. Another 6.5 million tax year 2015 returns claimed carryforward deductions of $55.9 billion.


TIGTA has previously found problems with carryforward claims in two earlier reviews, but said in its new report that the IRS still isn’t doing enough to ensure the accuracy of carryforward claims. A sample of 100 tax returns found that 63 taxpayers did not include the required statement with their tax year 2015 General Business Credit carryforward claims, and in other cases the claims didn’t match up with their prior-year returns.


TIGTA made six recommendations in its latest report, suggesting the IRS add criteria to its risk tool to identify high-risk carryforward Research Credit claims, and also to identify and examine returns with discrepancies of General Business Credit carryforward claims. Based on the results of this work, the IRS should expand the criteria to identify other carryforward claims with discrepancies if warranted. TIGTA also recommended the IRS prepare and submit an information technology request to address the problem. The report also suggested the IRS should develop a strategy to evaluate possible revisions to tax forms to capture carryforward claim information. While that strategy is being developed, the IRS should implement an educational campaign about carryforward claims.


The IRS agreed with three of TIGTA’ s recommendations, partially agreed with one recommendation, but disagreed with other recommendations, as well as TIGTA’s estimated numbers for the outcome measure.


“While some taxpayers may claim erroneous carryforward amounts, it is unreasonable to conclude that the tax effect is equal to the gross carryforward amount,” wrote Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “Carryforwards are only allowable in accordance with certain tax code provisions. Thus, taxpayers may never be able to utilize the full amount of the carryforward. Finally, there are legitimate reasons that discrepancies can exist which means the carryforward amount claimed may be correct even when it doesn’t reconcile to a prior year’s return. We reviewed a sample of discrepancy cases you identified and did not find any invalid claims.”




IRS Criminal Investigation needs to do more against ID theft

By Daniel Hood


Even as the Internal Revenue Service grappled with tax-related identity theft in recent years, the number of ID theft cases investigated by its Criminal Investigation division dropped significantly, according to a new report.


The report, from the Treasury Inspector General for Tax Administration, was the result of a review of CI’s efforts against identity theft that was spurred by indications in the Fiscal Year 2018 CI annual report that the unit would reduce the resources it devoted to ID theft cases.


According to TIGTA, the number of ID theft investigations launched by Criminal Investigation declined 75 percent from FY 2013 to FY 2017. While IRS resources overall were being squeezed at the same time, that decline outstrips other areas: The number of overall investigations initiated dropped by 43 percent, while the number of special agents in CI declined by 15 percent.


One critical problem lies in the fact that a significant pool of potential ID theft cases may never come to CI’s attention: Many “taxpayer-initiated incidents” — those where the taxpayer reports a problem, rather than the IRS identifying it — never reach the unit’s Scheme Tracking Referral System. In 2016, for instance, TIGTA found that as many as 98,000 taxpayer-initiated incidents were not placed in STARS.


“By not including these returns, CI may limit its ability to identify fraud characteristics for returns that bypass IRS filters for possible investigation,” TIGTA reported.


The inspector general also suggested that CI needed to better coordinate and document ID theft referrals from other parts of the IRS, particularly the Taxpayer Advocate Service, and the Wage and Investment Division’s Identity Theft Victims Assistance organization.


TIGTA recommended that the head of CI create a better way for other for other IRS personnel to submit “quality” ID theft and fraud referrals, but CI disagreed with the suggestion, saying that current referral channels are adequate to the task.




Tax Strategy: What’s new for 2019 tax returns

By Mark A. Luscombe


As we try to finish up the 2018 tax return filing season, it might be of some comfort to think that 2019 tax returns will not involve too much new that we did not encounter in 2018.


In general, that is true, although we still have some uncertainty even at this point hanging over 2018 tax returns, such as expired provisions and technical corrections to the Tax Cuts and Jobs Act that Congress is still looking at, which could affect both 2018 and 2019.


There might even be some hope that, as the Internal Revenue Service looks at problems encountered with the filing of 2018 tax returns, additional guidance may be forthcoming to help resolve some of those issues before 2019 tax returns are due. Still, there are a number of tax law changes and IRS changes that we know at this point will be new issues for 2019 tax returns.


1. The Form 1040

Form 1040-SR

The IRS has come out with its draft 2019 Form 1040, which is substantially different from the generally reviled 2018 Form 1040. Half of the new schedules that were added in 2018 have been dropped or combined with other schedules, with Schedules 2 and 4 combined, Schedules 3 and 5 combined, and Schedule 6 moved to the 1040 itself. The 2019 1040 looks more like the 2017 1040 than the 2018 1040, except that they tried to hold the line count closer to the 2018 1040.

The signature section is once again at the end of the form. It appears that the IRS decided that, unlike 2018, it might be a good idea to have the taxpayer signing on the same page on which the final tax numbers appear.


2. Health insurance mandate

The penalty for failure to obtain health insurance expired at the end of 2018, so there is no inquiry on the 2019 tax form about whether the taxpayer had health insurance or not. Keep in mind that, as of this writing, the Affordable Care Act is otherwise still in effect. Although a district court in Texas has ruled that the Affordable Care Act must fall if the individual mandate was eliminated, the force of that ruling has been suspended during the appeal process. The associated form for claiming exemptions or paying the penalty, Form 8965, has been retired as well.


3. Medical expense deduction

The medical expense deduction threshold, which was reduced to 7.5 percent for 2017 and 2018, has reverted back to a 10 percent threshold for 2019. Congress may try to restore the 7.5 percent threshold, but that has not happened yet.


4. Alimony

Effective starting Jan. 1, 2019, alimony is no longer deductible to the payer and is no longer taxable to the payee for divorce or separation instruments executed on or after that date. Since the deduction was often more valuable to the payer than the tax hit to the payee, this is generally a net negative for taxpayers.

Instruments executed prior to 2019 but modified in 2019 or later may choose in the modification to be governed by the old or new rules.


5. Qualified Opportunity Zones

2019 is the last year in which a contribution to a Qualified Opportunity Fund may qualify for the maximum 15 percent increase in basis for forgiveness of a portion of the deferred gain. After 2019, the maximum forgiveness falls to 10 percent.


6. Employer credit for family and medical leave

2019 is also the last year for the employer credit for family and medical leave created by the Tax Cuts and Jobs Act.


7. Tax breaks for beer, wine and distilled spirits

There were about half a dozen tax breaks in the Tax Cuts and Jobs Act related to beer, wine and distilled spirits that expire at the end of 2019.


8. Other new tax forms

The IRS is also issuing a number of new tax forms for 2019:

* 1040-SR: Congress mandated a new tax form for seniors. It is easier to read and includes a standard deduction chart.

* 8995 and 8995-A: These forms are to be used for calculating the qualified business income deduction, with 8995 being the simplified version and 8995-A for more complicated situations.

* 965-C, 965-D, and 965-E: These forms relate to various aspects of the taxation of unrepatriated foreign income.

* 8978: This form is designed to address a partner’s payment of a portion of the partnership’s imputed unpaid audit liability under Code Sec. 6226.

* 8985: The IRS has indicated that it plans to issue a new form titled “Pass-Through Statement.”
* 8997: In addition to Forms 8949 and 8996 with respect to Qualified Opportunity Zones, Form 8997 will be used as a report of initial and annual changes to Qualified Opportunity Fund investments.


9. Inflation adjustments

As is the case every year, a number of tax provisions are subject to inflation adjustments from the prior year. There are also a few provisions that had new amounts under the Tax Cuts and Jobs Act, such as Code Sec. 179 expensing and Alternative Minimum Tax exemption amounts, where the inflation adjustments start for the first time in 2019.


10. Form W-4

After pulling back from a major revision to Form W-4 for 2019, the IRS is once again trying for a major revision to the form for 2020, hoping that the lead time is enough for payroll processors to adjust.

There were a number of complaints about underwithholding for 2018 resulting in additional taxpayers owing tax who were accustomed to receiving refunds. The draft form, which the IRS hopes to finalize by the end of the summer of 2019, eliminates the concept of allowances since allowances were tied to the personal exemption, which has been eliminated. The IRS has stated that use of the new form by current employees is encouraged but not required.



Tax preparers should find fewer problems during the 2019 tax return filing season than they may have experienced for 2018 tax returns. The new issues that came up for 2018 returns will generally still be there for 2019, but hopefully additional guidance on problem areas will help address those issues.

We still must stay tuned for additional action by Congress on expired provisions, technical corrections, and a few other tax bills trying to work their way through as well, but it is at least helpful to remind clients of those changes that we do know about coming for 2019 tax returns.




On ransomware: How to stay safe in the cloud

By Tomas Suros


The recent spate of ransomware attacks against cloud-based accounting platforms has left many firms on edge, wondering about the security of data within their own firms — and rightly so. When a cyberattack strikes a hosted accounting system, it impacts the firm’s data and, more importantly, can expose critical client data.


Ransomware, which is frequently delivered through spear-phishing emails (emails that use social engineering to trick the receiver into giving out private information), is a type of malicious software that blocks users from accessing critical systems and data until a ransom is paid. According to FBI statistics, in 2018 alone U.S. businesses paid more than $3.6 million to hackers in these kinds of attacks. And that number doesn’t even include lost business, time, wages, files, equipment or third-party remediation services.


Law enforcement, government agencies and even leaders within the accounting profession have become more aggressive in the fight against such cybercrimes; however, cybercriminals have also become more sophisticated, more tailored in their attacks and more successful in damaging enterprise networks.


In fact, Cybersecurity Ventures predicts that there will be a ransomware attack on businesses every 14 seconds by the end of 2019 and every 11 seconds by 2021. Cybersecurity Ventures also predicts that global ransomware damage costs will reach $20 billion by 2021 — that’s 57 times more than it was in 2015.


As trusted advisors and keepers of vast amounts of sensitive client data, firms of all sizes can be dealt a devastating blow by ransomware. Falling victim to such attacks could lead to a loss of sensitive information (permanent or temporary), a disruption to regular business operations, financial losses and damage to a firm’s reputation.


Earlier this year, hosting provider Cetrom fell victim to a malicious virus that began encrypting files. Without other recourse, Cetrom took its systems offline to safeguard data as it scrambled to find the source of the breach. Meanwhile, CCH, a suite of accounting products under the Wolters Kluwer Tax & Accounting umbrella, also suffered a recent malware infection, Accounting Today reported.


We at AbacusNext also know how distressing a cyberattack can be. Just months after we acquired the hosting service Cloud9 in 2017, the service experienced a ransomware attack. Per our incident response plan, we immediately shut down the Cloud9 network and deployed engineers to our data centers. Ultimately 100 percent of our clients’ files were recovered successfully, but the incident did leave them without access to their data as our staff worked around the clock to restore files and ensure that the threat was contained.


These examples serve as an important reminder to accounting firms of the cyberthreats facing their business and the importance of taking a proactive approach to mitigate risks.


To help safeguard your clients’ data and your business, consider the following proactive measures.


Review a provider’s security capabilities

To ensure that your clients’ data is safe and secure when in the hands of a cloud-hosting provider, it is important to review the provider’s capability to secure data. Factors to consider include:

  • Is the provider a full-spectrum electronic protected health information (ePHI) and HIPAA compliance-ready solution?
  • Are its data centers in compliance? Given the current cybersecurity threat landscape and increasingly strict compliance standards, it has become common for organizations of all sizes to require strict assurance of certifications when contracting with third-party professionals. Those without certification are at a disadvantage. Common compliance standards include, but are not limited to, SOC1/SOC2/SOC3/SSAE16.
  • Does the provider offer multifactor authentication? If so, ensure universal implementation throughout your firm.
  • Do the data centers leverage biometric authentication?
  • Does the provider encrypt all data at the database level, both in transit and at rest?


Educate staff

“You can take all the cybersecurity steps in the world, but tax professionals and others in the business world should remember you are only as safe as your least educated employee,” said Chuck Rettig, IRS commissioner, in a recent press statement.


Rettig is right. Do not underestimate the importance of staff education. Take steps to raise staff awareness of cyberthreats and educate them on what to look for to help protect against attacks. As outlined by the IRS, encourage staff to adhere to the following:


  • Use separate personal and business email accounts.
  • Never open or download email attachments from unknown senders, including potential clients; make contact first by phone.
  • Send only password-protected and encrypted documents if files must be shared with clients via email.
  • Do not respond to suspicious or unknown emails.

Some additional security measures that firms must consider:

  • Patch all operating systems and applications (vulnerability management).
  • Make backup copies of important business data and information.
  • Secure wireless access points and networks.
  • Limit access to data and information by employees, and restrict the authority to install software.
  • Install and activate software firewalls on business systems.
  • Provide security for internet connections.
  • Plan faux-phishing campaigns to educate employees on best practices.
  • Conduct quarterly reviews of your security plan.


Have an incident response plan

Securing sensitive client data isn’t just good for your business and reputation. It’s also the law. Under the Federal Trade Commission’s Safeguards Rule, tax preparers must create and enact data security plans.


According to the FTC, the written information security plan, which describes a company’s program to protect customer information, must be appropriate to the company’s size and complexity, the nature and scope of its activities and the sensitivity of the customer information it handles.


Threats evolve as hackers become increasingly savvy and sophisticated, so it’s important to regularly evaluate and test your firm’s security plan and other safeguards you have in place.


And remember: If your firm suffers a breach, how you respond—and how quickly you respond—can significantly impact your firm and its reputation. Therefore, it’s important to create an action plan outlining the steps your firm would take in the event of an attack. This can save your firm time and help mitigate further damage should an attack occur.


Ransomware poses a threat to firms of all sizes. Safeguarding your clients’ sensitive data and protecting your business start with taking proactive measures to mitigate risks. For help, turn to a technology partner that understands your firm’s unique needs and can assist with disaster recovery planning and reliable backup solutions.




IRS adds more countries to information exchange lists

By Michael Cohn


The Internal Revenue Service issued a revenue procedure Tuesday adding one country, Georgia, a former Soviet republic that’s located between Europe and Asia, to the list of countries with which the U.S. has in force an information exchange agreement so that interest paid to the residents of those jurisdictions must be reported by payors.


Revenue Procedure 2019-23 adds Georgia to the list of countries as required under the Nonresident Alien Deposit Interest Regulations.


The revenue procedure also adds two other jurisdictions — Curaçao, a Dutch Caribbean island, and Cyprus, an island republic in the East Mediterranean, to the list of jurisdictions with which the Treasury and the IRS have decided that it’s appropriate to have an automatic exchange relationship with respect to bank deposit interest income information under those regulatory provisions.


The revenue procedure also includes a list of the other jurisdictions where the deposit interest reporting requirement applies, along with a list of jurisdictions where the Treasury and the IRS have determined that automatic exchange of deposit information is appropriate.


The regulations go back to 2012 and have been updated over the years in an effort to discourage people and businesses from hiding their income in jurisdictions where they can avoid paying taxes.




Intuit adds health insurance benefits to QBO Payroll

By Ranica Arrowsmith


Intuit has added medical, dental and vision benefits capabilities to QuickBooks Online Payroll through an integration with SimplyInsured.


SimplyInsured is an online platform that helps small businesses compare and purchase employee medical, dental and vision insurance plans. Users of QuickBooks Online Payroll can now compare plans side by side to find the one that best fits their business and budget. Once a business owner has chosen a plan, he or she can apply through QuickBooks Online Payroll. Employers can also manage relevant business details, including payroll and health insurance benefits, within QuickBooks.


The move is one step closer to making QuickBooks a one-stop shop for small businesses and their accountants. QuickBooks recently conducted a survey of small business owners and HR professionals, and found that 71 percent of small businesses with 1 to 50 employees already offer their employees some kind of health insurance benefits. Two-thirds of the respondents said offering health insurance is very important for attracting employees and 58 percent said it was very important for retaining employees. For the 29 percent of small businesses who don’t currently offer health benefits, more than one-third (36 percent) said they had no idea how much offering health insurance for employees would cost, and nearly half (45 percent) said they did not know what steps to take to get group health insurance for their employees. The majority (56 percent), however, said they would be more inclined to purchase health insurance if it were linked to another product, like payroll. Given these findings, QuickBooks aims to encourage more business owners to offer health insurance for their employees, as it’s now easier to navigate and manage.


Additional features of the integration with SimplyInsured include:

  • QuickBooks will automatically calculate employee benefit deductions so business owners don’t have to.
  • Business owners will be able to see quotes from SimplyInsured based on zip code, without having to enter any data.
  • Full-time customer support is available to help business owners with their insurance questions. Customer support is available Monday through Friday between 7 a.m. to 5 p.m. PT.


“We know that many small business owners want to do right by their employees and offer health insurance benefits, but many feel it’s too expensive or confusing,” said Olivier Bartholot, director of QuickBooks Payroll, in a statement. “When we focus on helping small business owners with the many aspects of managing their employees, we can turn one person’s dream into a thriving team. By connecting them with affordable medical, dental and vision insurance directly within QuickBooks, we’re making it easy, fast and cost effective for small businesses to offer their employees insurance plans, helping them to attract and retain top talent.”




New risks emerge for accountants

By Roger Russell


Being on the defensive in a professional liability lawsuit can have devastating effects on an individual CPA or a firm. Not only does it open them up to economic loss, but it calls into question the competence and integrity of the CPA, things they have taken years to build.


And it doesn’t go away overnight, often taking years to settle a large suit. “The amount of time getting ready for depositions, or to attend a mediation or arbitration can take a large chunk out of your life,” said Bill Thompson, president of CPA Mutual. “It can take a mental toll on defendants.”


But doing it on your own, without the involvement of a knowledgeable insurer that routinely handles such matters, would be even more unpleasant.


“Occasionally I run across a firm that has elected not to have coverage,” said John Raspante, director of risk management at McGowan Pro. “I point out to them that if they want to sell the firm, a buyer won’t be interested if they can’t get tail coverage, and you can’t get tail coverage unless there’s an existing policy in force.”


Tail coverage, also known as an extended reporting period provision, allows the insured to report claims made after a policy has expired or been canceled, if the act giving rise to the claim occurred during the policy period.


“We’re still at a high level of accounting firm sales, and by all accounts this pattern will continue, due to an aging profession and succession issues,” said Raspante. “So it’s important to have tail coverage. Consultants in the mergers and acquisitions field say the whole question of a tail can be a deal killer.”


“A tail is an extension to an existing coverage,” he explained. “It takes the current policy and adds an endorsement that upon the sale of the practice the policy will continue to cover claims made as far back as the retroactive date [the inception of the policy]. If the practice is sold and the purchaser gets a five-year tail, any and all claims as far back as the retroactive date will be covered for the period of the tail ­— three or five years after the sale of the practice. It gives the buyer a lot of comfort knowing that if something comes up, there’s a policy that will react and cover that peril. With more accountants retiring and mergers occurring, the question of a tail needs to be looked at closely.”

AT-090419-Firms hit by cyberattacks 2019 CHART


New risks

“We’re seeing more and more accounting firms jumping into servicing the cannabis industry,” Raspante observed. “Obviously, the profit potential is enormous, but accountants should not make false assumptions that their policy will provide them coverage. They need to have their agent explain any limitations.”


“The federal government still considers this an illegal drug, and some policies have an exclusion for illegal activities,” he said, “The policy might put in an endorsement to cover cannabis services, but accountants need to take a close look at the policy to see if it will cover third parties, not just a client. If a cannabis grower raises money through an initial public offering, it’s not just potential clients that can sue the CPA — the public that bought shares in the IPO can also sue. If that happens, you want to make sure that the policy will respond, so check to see if there is an exclusion that would apply to cannabis services, and if there’s an endorsement to cover it.”


A cyber policy might have sublimits, which lowers the recovery from the full policy coverage, Raspante noted. “The recovery would be limited to a smaller amount than the full policy limit in the event of a claim. A full stand-alone policy might be preferable, but the additional premium could be excessive depending on the size of the firm. It starts out low, but when you get to higher limits with a firm of, say, 100 employees, it could be a very material amount. Of course, that’s why a lot of firms don’t buy a stand-alone policy,” he said. “There’s a trade-off between the risks you think you might have versus the size of the premiums you’re willing to pay.’


While some policies cover only claims brought in the U.S., others provide coverage for claims anywhere in the world. “There’s not that much difference in premiums,” said Raspante. “Buyers should only purchase policies with worldwide coverage. With the convergence of international standards, you want to have coverage for claims brought anywhere in the world.”


There are multiple issues that CPAs need to be aware of to avoid situations that might create risk. Insurers stay abreast of these issues and communicate them to their insured.


“On July 1, 2019, an AICPA Professional Ethics Executive Committee ethics interpretation went into effect that says CPA firms shouldn’t be the sole source of an attest client’s records, as this impairs the firm’s independence,” noted Dave Sukert, senior vice president at Aon Affinity Insurance Services Inc. “Firms with the tech infrastructure to provide these services need to be aware of and understand this interpretation, and how it might apply to them.”


“The insurance marketplace is seeing an increase in pricing across the board for errors and omissions insurance,” said Ricard Jorgensen, president and chief underwriting officer of CPAGold. “Losses in other classes of professional liability insurance, for example, directors & officers liability, are driving rate increases of some 20 to 30 percent for some professionals. This has yet to materialize in the accountants’ professional liability marketplace, but there will likely be some pressure in the next 12 to 18 months. Firms should look to the promotion of positive risk management features like loss control education, client screening, maximizing of engagement letter usage, use of mediation clauses in engagement letters, and avoidance of certain high risk areas of practice to keep costs down. A clear, concise and well-presented application is crucial to a successful renewal negotiation.”


“Over the past decade, policyholders and specialty insurance brokers have won hard-fought coverage concessions from insurers which have enhanced the quality of professional liability protection available to CPAs,” said Jorgensen. “This includes full tort coverage (not limited to negligence), a broad definition of covered services (not a list of services), and additional section like theft of client records or cyber liability.”


To offset any price increases, certain insurers offer stripped-down coverage that takes away many of these benefits, according to Jorgensen. “Check the policy that is being proposed to you,” he advised. “Review the policy carefully, and look out for words like ‘negligence’ or ‘false pretense.’ Check the exclusions to see how they might impact your practice. Saving money is fine, unless you buy an inferior policy. The uninsured costs could be substantial — the most expensive insurance policy just might be the cheapest one.”







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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