AZ CPA July August 2015

AZ

CPA JuLY/AUGUST 2015

The Arizona Society of Certified Public Accountants

Fraud Schemes

Target CPAs

2014-15 Political Contributions Report IRS Service Issues

www.ascpa.com

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AZ

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Volume 31 Number 6

CPA Gains Experience Running for Office

15

Arizona CPA Diane Landis writes about her run for the Arizona House of Representatives.

by Diane H. Landis, CPA, PFS, CGMA

Internal Revenue, Hold the Service

17

Budget cuts, more work and reduced resources mean diminished service for CPAs and taxpayers contacting the IRS.

by James Mahoney, CPA

Features ASCPA Member Explores Unique Opportunity in the United Arab Emirates

CPA Firms Targeted by Fraud — The Counterfeit Check Scheme 11

Read about Maris Thomas’ experiences as she relocats to Dubai for six months with Financial Navigator, Inc.

One CPA’s experience dealing with a typical fraud scheme.

by Steve Koons, CPA, ABV, CFF, ASA

by Maris Thomas

2014-15 ASCPA Politicial Contributions Report

13

ASCPA members contributed more than $58,000 last fiscal year to open doors, share ideas and make sure the CPA voice was heard.

Arizona Society of Certified Public Accountants 4801 E. Washington St., Suite 225-B Phoenix, Arizona 85034-2021 www.ascpa.com

4 AZ CPA y JULY/AUGUST 2015

22

Columns & Departments 6

Chair’s Message by Robert E. Dubberly, CPA

7

Focus on Members

9

A Dash of SALT by James Busby, Jr., CPA

26 Classifieds 27

In the Black ... Adventures in Accounting

AZ

CPA

The Arizona Society of Certified Public Accountants

President & CEO

Cindie Hubiak

Editor

Patricia Gannon

Copy & Advertising Deadline The first of the month one month prior to publication date.

Board of Directors Chair Chair-Elect Secretary/Treasurer Directors

Rob Dubberly Greg Nelson Molly Montgomery Mike Allen Brenda Blunt Teresa Finley Gary Fleming Randy Fletchall Mike Holt Bill Judge Jennifer Nordstrom Mark Patton Vanesa Romero Curtiss Smith Nancy Thomas

Immediate Past Chair Anita Baker AICPA Council Members Karen Abraham Armando Roman Chapter Presidents Southern Chapter Northern Chapter Southwest Chapter North-Central Chapter

Cathy Poore Bethany de Alva Jennifer Sullivan Ellen Carpenter

AZ CPA is published by the Arizona Society of Certified Public

Accountants (ASCPA) to provide information, news and trends in the profession of accounting. It is distributed 10 times a year as a regular service to members of the Society. The ASCPA, its members, board of directors and administrative staff assume no responsibility for advertisements herein. The ASCPA and the above people also assume no liability for business decisions made by readers in reference to statements and/or claims in advertisements within this publication. Opinions expressed by correspondents and contributors are not necessarily those of the ASCPA.

Arizona Society of CPAs 4801 E. Washington St., Suite 225-B Phoenix, AZ 85034-2021

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Chair’s Message

by Robert E. Dubberly, CPA

Expectations of Quality As we head into summer, a time of vacations and a time to recharge our batteries, I wanted to address a topic that is pertinent to all of us, no matter what role we hold within the accounting profession. That topic is quality.

As a CPA in public practice, specifically an audit partner, I spend a great deal of time thinking about quality. First and foremost, I think about it in the context of the audit.

Ensuring that my teams and I execute an audit plan that meets the respective professional standards is mission critical. While audit quality has always been top of mind, the current regulatory environment has only heightened our collective awareness.

Next, I think about quality as it relates to my understanding of the accounting literature. My clients, potential clients and teams have an expectation that I have a thorough knowledge and up-to-date understanding of the accounting principles that impact their respective businesses or engagements.

This expectation has only grown and continues to expand as the accounting literature has become more complicated. And while there’s been a call for accounting simplification, I’m not optimistic this will occur in the near term – especially in light of the new revenue recognition standard that encompasses approximately 600 pages of guidance.

Last of all, given that I serve clients (both internally and externally), I think about the quality of the service that I provide. Translating the complexities and demands of both the audit and

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accounting worlds into a service component with the hopes of providing an exceptional client experience is a complicating factor for today’s audit professional.

While I’ve dissected this notion of quality down to a trifecta of areas for which I continue to develop and hone my own personal skills, most speak in generalities about quality.

What I’ve learned after over 20 years in professional services is that the reputation of our company or more succinctly the name on our business card often gets us in the door, but it’s our personal brand that keeps us in the building. Due to this incredible responsibility, we must ensure that the service and work product delivered is of the highest quality as one misstep could tarnish our collective brand.

Recently, as I was traveling, I experienced how the lack of quality service can quickly tarnish a brand. As our crew inspected the plane, they discovered a leak in one of the fire extinguishers. As a result, this maintenance item delayed my flight. Several hours later, and with little interim information, the ground crew suddenly rushed us to board the plane. Once onboard, the Captain informed us that a replacement extinguisher had been located.

After what seemed to be an eternity, we were informed that the new found ex-

“We must ensure that the service and work product delivered is of the highest quality as one misstep could tarnish our collective brand.” tinguisher did not meet regulatory approval, because its required paperwork was missing. At this point, we had to wait for the arrival of a flight from the U.S. transporting an approved extinguisher. As I observed the sequence of missteps, I couldn’t help but think about the individuals who made the decision to rush passengers onboard the flight without having all of the information. In making this uninformed decision, these employees set the stage for a challenging customer experience that placed us passengers on the plane for approximately four hours. Because of this error in judgment, the employees sacrificed the company’s quality as it relates to service and ultimately tarnished the brand.

Inherently as CPAs, we are looked upon as providers of quality. As such, we should always look for opportunities to enhance our brand and not AZ CPA tarnish it.

Focus on Members

2015 Leadership Day

Vi c t o r i a C .

Harris, CPA, was recently named managing partner of Hunter Hagan & Company, Ltd. T r a v i s Magneson, audit manager, was recently appointed to president of the Institute of Management Accountants – AZ Valley of the Sun Chapter.

Rob Dubberly and Eduardo Jordan

James Busby and Mark Patton

Richard Magrogan, CPA, was promoted to partner at Morton CPAs, P.C. Katie Thomas, CPA, was hired as accounting manager of Signature Analytics.

Gary Fleming and Armando Roman

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A Dash of SALT

Five Important Limitations and Six Alternatives to Arizona’s Amnesty Program This month’s state and local tax (SALT) column summarizes five limitations and six alternatives to Arizona’s upcoming amnesty program.

Many taxpayers will extinguish outstanding Arizona tax liabilities without paying interest or penalties during the state’s amnesty program, which runs September 1, 2015 through October 31, 2015.

In my May 2015 column, I summarized some of the benefits of the program. However, not all taxpayers qualify for the amnesty program, and there are better alternatives for some taxpayers.

Five Important Limitations to Arizona’s Amnesty Program Some of the limitations to Arizona’s upcoming amnesty program include: 1. Amnesty Participants Forfeit Appeal Rights Upon submitting applications to participate in Arizona’s upcoming amnesty program, taxpayers forfeit all administrative and judicial appeal rights related to the tax liabilities included in the applications.

2. Arizona’s Nasty Statute of Limitations Arizona’s statute of limitations is not affected by Arizona’s amnesty program and, unlike the normal three-year statute of limitations in effect in many states and in matters involving the IRS,

Taxpayers who participate in Arizona’s amnesty program must pay the tax due at the time they submit their amnesty application.

Arizona’s normal statute of limitations is four years from the time that a tax return was due or filed, whichever period expires later. As with the IRS, in situations where the income on a return was understated by 25 percent or more, Arizona’s statute of limitations is six years. And, as with the IRS, in cases involving fraud or failure to file a return, there is no statute of limitations in Arizona.

Six Alternatives to Arizona’s Amnesty Program

3. Amnesty Does Not Apply to City Sales Taxes Arizona’s amnesty program does not apply to city sales taxes, not even those that are collected by the Arizona Department of Revenue (Department).

1. When Justified, Don’t Give In Taxpayers with strong cases should not feel compelled to give in and pay disputed taxes during Arizona’s amnesty period just because the penalties and interest will be waived. Not paying any tax that is not lawfully due is better than just getting the penalties and interest abated on tax that isn’t lawfully due.

And, because Arizona just increased the amount of fees taxpayers may recover when they prevail in a tax dispute, taxpayers no longer need to feel as much pressure to give in when faced with questionable assessments as they may have in the past.

Except for property tax appeals, Arizona is not a “pay to play” state, so taxpayers do not have to pay disputed tax assessments to appeal them. But, interest continues to accrue during the appeals process. So, taxpayers who

4. Amnesty Requires Original or Amended Returns The program requires taxpayers to submit the appropriate original or amended return(s), which may not be too burdensome for taxpayers who only have an outstanding tax liability during one reporting period. But some types of tax returns are due monthly rather than annually and some taxpayers have outstanding tax liabilities that cross multiple periods.

5. Amnesty Requires Immediate Payment of All Tax

There are at least six alternatives to Arizona’s amnesty program. Depending on each taxpayer’s individual facts and circumstances, one or more of these alternatives may be better for a particular taxpayer with an alleged outstanding tax liability than Arizona’s amnesty program. A short description of each alternative, along with some of their pros and cons, is included below.

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want to hedge their bets during the appeal process may stop interest from accruing by paying the disputed tax under protest.

2. Pursue a Voluntary Disclosure Agreement CPAs in public practice may try to negotiate voluntary disclosure agreements with the Department for their client under which the CPA will only identify their client to the Department if the Department agrees to enter into an agreement with their client under terms that are satisfactory to the client.

So, for example, a CPA may be able to negotiate an agreement with the Department for a client who underreported taxes for seven years under which the taxpayer only has to pay tax and interest for the last four years, and the Department agrees not to audit prior periods or pursue penalties. Depending on the type of tax involved, the Department may not require the taxpayer to file original or amended tax returns as part of the voluntary disclosure agreement.

3. Pursue a Managed Audit Taxpayers may offer to enter into managed audit agreements with the Department. Under such agreements, the Department agrees not to assess

penalties or interest on any liabilities that are uncovered during the course of the audit as long as the liability is paid within forty-five days of the assessment and the Department does not find that the taxpayer committed fraud, tax evasion, or collected monies that were represented as tax but not remitted to the state. In return, the taxpayer or its representatives must do most of the leg work for the Department to review.

4. Pursue a Closing Agreement Taxpayers may enter into closing agreements with the Department to resolve issues based on the risks and perils of litigation. So, for example, if the Department audits a taxpayer and issues an assessment for $10,000 for a particular issue but the Department and the taxpayer agree that the taxpayer has a sixty percent chance of prevailing if she goes to court over the issue, they may enter into a binding agreement to resolve that issue by having the taxpayer pay $6,000.

5. Pursue Relief Under the Taxpayer Bill of Rights As explained in my June 2014 column, Arizona’s Taxpayer Bill of Rights allows the Department to grant relief to entire classes of taxpayers in situ-

Behind the Scenes: Press Coffee Roastery July 23 — 10 a.m.-Noon Please join us as we go behind the scenes to (see, smell and taste!) Press Coffee. This locally owned coffee roaster has two locations in the Valley in addition to the roastery. Come get a unique perspective on how your morning cup of java came to be. We will learn about the margins in brewing a cup of coffee, the process of purchasing beans and commodity futures with the fluctuating coffee market, and managing inventory.

We will also go through the process of cupping as we tour the roastery.

www.ascpa.com

10 AZ CPA y JULY/AUGUST 2015

ations where there was an “extensive misunderstanding or misapplication” of any of the tax laws administered by the Department. Relief may come in the form of the abatement of some, or all, of the tax, penalties, and interest that otherwise would have been due for any particular period.

6. Pursue an Offer in Compromise Finally, the Department can make payment arrangements, and even abate some of the taxes that would otherwise be due, for taxpayers who agree that they owe the tax but are unable to pay it. To pursue such arrangements, taxpayers must submit an offer in compromise, which require the taxpayer to disclose detailed information about their income, expenses, assets, and liabilities. If the taxpayer fails to timely make payments under such an agreement, they Department can void the agreement and pursue collection of the entire deficiency.

Practice Tip! – Rather than encourage or allow their clients to leap into Arizona’s amnesty program without looking into all of their options first, savvy CPAs help their clients identify the pros and cons of the various options available to them to resolve outstanding tax liabilities.

AZ CPA James G. Busby, Jr., CPA, is a state and local tax attorney at The Cavanagh Law Firm and a member of the ASCPA. Busby previously worked in the SALT departments at Arthur Andersen and Deloitte & Touche. Before entering private practice, Busby was in charge of all transaction privilege (sales) tax audits at the Arizona Department of Revenue. A Dash of SALT ™ is provided for educational and informational purposes only and does not constitute legal counseling or other professional services. If you have any questions, please contact the author. He can be reached at (602) 322-4146 or JBusby@ CavanaghLaw.com.

ASCPA Member Explores Unique Opportunity in the United Arab Emirates

by Maris Thomas

In December 2014, I was offered an opportunity: “relocate to Dubai for six months — Financial Navigator, Inc. will provide transportation for you and your husband, an apartment and a car.” It was an opportunity not to be missed. We arrived in early December and had two weeks to learn the ropes before my boss returned to California.

The company office is in the Dubai International Financial Centre (DIFC), a Free Zone business area for regulated and non-regulated, foreign-owned enterprises. It represents the best of the diverse, dynamic and professional growth taking place in the MENA (Middle East and North Africa) region. The business environment is complex with equal measures of opportunity and obstacles.

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Three Emirates

Burj Khalifa

Maris Thomas in her office.

Falconer at QAH Festival

Camel Races

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While companies in the DIFC are governed by Common Law, Sharia law and Islamic finance are held in high regard and influence the way transactions are structured. Family offices, succession planning and governance are evolving as second- and thirdgeneration entrepreneurs move into leadership positions.

Dubai and the DIFC are populated by a diverse mix of ex-patriots. Some have been here more than a decade, some only a few weeks. There are Americans, but we are out-numbered by Brits, Aussies, Indians, Filipinos and Africans. The city is cosmopolitan, but unique and strives to maintain its rich cultural heritage.

My responsibilities have evolved during my time here but have always afforded us lots of time to sightsee and learn. Friday is the Sabbath here and most of the DIFC is closed. Sunday is the first business day of the week, but nothing can be done when your business contacts are in Silicon Valley. Much of the time I’ve worked Monday to Thursday and enjoyed a three-day weekend!

While here, we have visited all seven of the emirates—each has a major city with the same name. Abu Dhabi is the largest and capital of the UAE. The others are Dubai, Sharjah, Ajman, Umm Al Qaiwain, Ras Al Khaimah and Fujairah.

Each is led by a Sheikh and officials representing its ruling family. All are on the coast of the Arabian Gulf except Fujairah which is on the Gulf of Oman. The most memorable sights include ancient forts and vast deserts; Dubai’s high-rise skyline including the Burj Khalifa, the tallest building in the world; and the Sheikh Zayed Grand Mosque in Abu Dhabi, fourth largest in the world.

Our adventures have included camel races, extreme SUVing over the dunes, heritage events with falconry and masked women, the Dubai Desert Classic golf tournament and exploring some of the most amazing hotels and shopping malls in the world. While based in Dubai, we have also visited New Delhi, India and Muscat, Oman. It was truly “once-in-aAZ CPA lifetime” adventure!

Maris Thomas recently completed her career at SmartHealth, Inc. in Phoenix.

2014-15

ASCPA Political Contributions Report Rob Dubberly, Jennifer Sullivan, Rep. Darin Mitchell and Cindie Hubiak

The ASCPA PAC has your back! When it comes to being successful as a CPA, you’re covered. The ASCPA PAC is the voice of the CPA profession in Arizona. Lawmakers listen when we speak and initiate conversations with us to improve their decisions. Guided by our lobbyists of more than 20 years, DeMenna & Associates, the ASCPA PAC and ASCPA leaders contribute money to a wide variety of candidates, current lawmakers and both major political parties. We make sure those who impact the CPA profession know we represent more than 5,700 CPAs who care about their credential and Arizona.

“I contribute to the ASCPA PAC because I have seen the impact of legislation on my practice and the lives and businesses of my clients. Every year, the ASCPA works hard to convince our Arizona legislature to pass legislation conforming the Arizona tax law to the prior year changes in the federal tax law. Our lobbyists, ASCPA staff and members educate and push legislators to make it happen. The ASCPA has worked hard to stop,

Ben Podraza, Cindie Hubiak, Rep. Mesnard, Peggy Ullmann and Michael Lemme

reverse, rehabilitate or amend poor legislation to avoid the harm it would do to my practice and my clients. Contributions by the ASCPA PAC to the candidates give us a voice with the legislators. It takes dollars (way more than just mine – it takes yours too!) to be at the table. It is critical for the profession, for our clients and for the State that we be at the table.” ~ Brenda A. Blunt, CPA, CGMA

Total ASCPA Political Contributions for 2014-15

$58,581 Amount contributed to candidates/causes Gov. Ducey and Peggy Ullmann

$54,348

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Our PAC working for YOU! The Arizona Society of CPAs has one of the most powerful political action groups in Arizona — thanks to you! We want to thank every one of our members who gave to the PAC this year. Listed here are people who contributed more than $250 to our legislative efforts. In 2014-15, every member of the ASCPA Board of Directors contributed at least $500.

Sandra A. Abalos Karen M. Abraham Michael T. Allen Mark M. Anderson Cord D. Armstrong Susan A. Armstrong Corey Arvizu Anita F. Baker Connie L. Baker Steven E. Bandler Donald R. Bays Bruce D. Beach Lawrence Bello Brenda A. Blunt Francis J. Brady Brenda K. Brandt James F. Brewer Christine Brueser Jay L. Buck James J. Buhr Ronald Butler, Jr. Debra A. Callicutt Brian J. Campbell George M. Cohen Sandra L. Cornstrom Andreas D. Coumides, Jr. David M. Damron Lisa L. Daniels Ben L. Darwin Craig S. Desnoyer Bradley S. Dimond Scott A. Donaldson Robert E. Dubberly Mary K. Duffy Mark F. Eberle Lawrence Field Michael T. Finnegan Debbi Fitzgerald Marc D. Fleischman Gary Fleming Michael I. Fleming Randy G. Fletchall Barry R. Friefield Thomas L. Friend Gary L. Gethmann David Gifford Rufus Glasper Richard H. (Rick) Goldenson Charles H. Goodmiller

Diane Groover Darlene D. Hagan Anthony M. Hakes Robert G. Harbour Stephen T. Harris William C. Heimerdinger George Henderson Dale R. Hensley William J. Hodges, Jr. Herbert J. Hoffman Mike Holt David L. Hopkins Terry L. Hothem Cindie Hubiak Daniel B. Hughes Marla V. Hummel Debra Hunter David M. Iaconis Charles J. Inderieden Janis K. Isaacson Craig J. Isakson Thomas G. Johnson Bill Judge Richard F. Kalenka Colette Kamps Julie S. Klewer Joel B. Kramer Chad D. Kunze Mark I. Landy Sue M. Landy Donna H. Laubscher Chris W. Ludwig Christopher A. Lutes Johannes J. Marais Marilyn M. Mays Jeffrey C. McClain Karen McCloskey Kevin McHolland Charles A. McLane George H. Mcnamara Norman R. Mendoza, II Pamela A. Michaud David G. Miller, Jr. Adam J. Miller Dennis E. Mitchem Bryan W. Mogensen Molly Montgomery Dan Nahom Allen L. Nahrwold

Ralph G. Nefdt Greg Nelson Bruce J. Nordstrom Jennifer Nordstrom Zandra L. O’Keefe Dennis J. Osuch Tyler J. Pace Bridget Phillips David P. Phillips Bradley J. Preber John Prenzno William A. Ray Troy W. Rice Jay R. Rold Armando G. Roman Vanesa Romero Eric S. Rudner LeAnn M. Rudolph Cynthia A. Schroeder Richard R. Schultz Jay Senkerik Robert S. Shanley Stella M. Shanovich Lisa A. Shepard Jennifer L. Shields Layne R. Simmons Gary W. Smith Jeremy A. Smith Andrew M. Spillum Ronald L. Stearns Tracy L. Stone Michael E. Straneva Steven L. Tait Joseph A. Tameron Philip W. Taylor Dennis L. Tingey Melissa Tomlinson Candace B. Tooke Sandra L. Torre Peggy H. Ullmann Jared W. Van Arsdale Craig Van Slyke Carlos E. Wagner Michael J. Wagner Scott T. Wallace Matthew Waller Brooke M. Westemeier Corrine G. Wilson Donna Witherwax Susan Wolak G. James Wright Robert Wyndelts Mary T. Yaconiello Bryan A. Zall Edward K. Zollars

The CPA voice is heard loudest when we combine our resources, both knowledge and financial. Our members contributed more than $58,000 last fiscal year to open doors, share ideas and make sure the CPA voice was heard. Please make sure this continues by contributing today at www.ascpa.com.

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CPA Gains Experience Running for Office

by Diane H. Landis, CPA, PFS, CGMA

Experience That Matters – that was the tag line for my 2014 run for the Arizona House of Representatives. When I was approached about running for the legislature in 2012, it was a surprise and stimulated several thoughts.

I remember that process: Why would I run? What did I have to offer? After all, I did not want to run just to run. My answer came to me fairly quickly.

Arizona was facing tough economic times, and I was stunned when the Arizona Society of CPAs told me there were no CPAs in the Arizona House of Representatives and only one in the Arizona Senate. Almost every decision the House faces is budget related and we had no elected representatives with CPA credentials. I knew I wouldn’t have all the answers, but we are trained to look, question and analyze, so a fresh set of eyes would be beneficial. With a finite amount of resources, and more need than money, it is critical we are getting the most out of every single penny. Additionally, water, agriculture and military bases are all critical to our state, and my district, in particular.

I have not taken a traditional path as a CPA. I’d been a CPA for more than 25 years and a Personal Financial Specialist (PFS) since 2001. I started out with the Arizona Auditor General’s Office. My husband was transferred, I then worked at a large local CPA firm in Washington, D.C., doing audit and tax work for both individuals and small companies. Suddenly, politics entered my world. I served briefly in the White House Office of Presidential Personnel, then was asked to be the White House Liaison for the US Department of Veterans Affairs, all under President George H. W. Bush.

We returned to Arizona at the end of his administration, and I spent 14 years as a stock broker and financial advisor.

I helped my clients retire and stay retired. Later, I ran for and was elected

to a four-year term as a Litchfield Park City Councilmember. Like the state, the budget was critical to our success as a City. In addition, in 1994, my family started a small software business.

Giving back to the community has always been important, so I also served on several boards, including a two-year term as Board President of the Southwest Lending Closet, a wonderful all volunteer nonprofit organization. I was also a part of a team of five involved in bringing the Special Olympics National Invitational Golf Tournament to Litchfield Park in 2012.

So, back to why I decided to run ... I knew I was a perfect fit for this geographically large, diverse and gerrymandered district, which included Yuma, Buckeye, Litchfield Park, Goodyear and Wickenburg; rural and urban.

Growing up on a working cattle ranch literally on the Mexican border and attending a one-room school, I grew up rural. I had lived and worked in rural, agriculture-oriented Yuma, where farming is critical, and have lived in Litchfield Park since 1993. This rancher’s daughter also understood first hand, water, border and agriculture issues. I possessed a unique financial background and credentials that are, and would continue to be, critical to our state, because of the budget and financial issues going on at this time.

As you know, the budget is the most important job of the legislature. I felt our state needed some of the financial planning tools I had mastered, along

with my background in budgeting.

There are three military bases in our district and lots of veterans calling Arizona home, so my deep understanding of veterans and veteran’s issues, having served for almost four years in the US Department of Veterans Affairs, and being married to a Vietnam Veteran, was another checkmark.

I decided to jump in. I believed it was time to have a CPA in the House of Representatives. I was qualified, and I wanted it to be me.

Again, my campaign was built on experience that mattered. I had the desire and the right skills, at the right time to make a difference.

Running was fun, exhausting, exhilarating, and required a lot of travel. I met wonderful people and had the support of some very helpful CPAs throughout the district. How lucky was I? Losing was disappointing, but not devastating, and an experience I wouldn’t trade. I have no regrets, as it just wasn’t meant to be — in 2014.

AZ CPA

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Internal Revenue, Hold the Service

by James D. Mahoney, CPA

Taxpayer service has been a big part of what enabled the IRS to address its mission: To provide taxpayers with top-quality service by helping them understand and meet their tax responsibilities and by applying tax law with integrity and fairness. But that playing field has changed. The traditional notion of dealing with the IRS – such as when handling an audit or collection case – is no longer true. Does that mean routine face-to-face office audits, field audits and negotiating an installment agreement with a revenue officer are a thing of the past? Yes, it does.

You will notice that the word “service” is prominent in the description provided above of what the IRS is all about.

That service aspect – at least what we’ve been accustomed to – is likely gone. National Taxpayer Advocate Nina E. Olson released her 2014 annual report to Congress on Jan. 15, 2015. The report describes the decline in

taxpayer service in detail, and attributes the decline to a combination of more work and reduced resources. She reported that the diminished service expectations for fiscal 2015 are as follows: • The IRS is unlikely to answer half the telephone calls it receives, and levels of service may average as low as 43 percent.

• Taxpayers who manage to get through are expected to wait on hold for 30 minutes on average, with considerably longer waits at peak times.

• The IRS will answer far fewer tax-law questions than in past years. During filing season, it will only answer “basic” tax-law questions; after filing season, it will not answer any tax-law questions.

This means roughly 15 million taxpayers who file later in the year will be unable to get answers to their questions by calling or visiting IRS offices.

• Tax return preparation assistance has been eliminated.

Over the years, efforts have been made to maintain some level of service with fewer resources. Computer-

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The IRS is responding to an environment of budget cuts, a shrinking workforce, travel restrictions, limited training budgets, and frustrated workers who are asked to do more with less.

generated collection notices and referrals to the IRS website to seek solutions to problems, for example, enable the IRS to reach more taxpayers at a lower cost. The IRS is responding to an environment of budget cuts, a shrinking workforce, travel restrictions, limited training budgets, and frustrated workers who are asked to do more with less.

Based on this outlook, nobody could blame the IRS if it considered a name change to Internal Revenue instead of Internal Revenue Service, but I doubt its reduced budget would allow for new signage and letterhead.

With all that being said, CPAs have a close relationship with the IRS, so we have to play the cards we are dealt.

Correspondence Examinations

The audits of individual returns are rarely conducted in a face-toface setting. They have evolved into correspondence examinations. These correspondence examinations allow the IRS to reach more taxpayers at a lower cost. These examinations are generally

18 AZ CPA y JULY/AUGUST 2015

conducted at one of the IRS campus offices (Service Centers), but the actual site assigned to work the examination is dependent on workload and worker availability. The Internal Revenue Manual (IRM) 4.19.11.1.3 provides a list of issues that are conducive to correspondence examinations.

Examples include dependency exemptions and related credits (Earned Income Tax, Child Care, Adoption, etc.), Hope and Lifetime Learning credits, Schedule C or F income and expenses, employee business expenses, home-office deduction (if a tour is not required), and some itemized deductions.

The problem, from what I have noticed, is that most items subject to correspondence examinations are not items in the IRS guideline. I have found that the No. 1 issue raised in correspondence examinations is employee business expenses. This is not easy to address through correspondence.

Information for a salesman who drives 20,000 to 30,000 business miles a year just isn’t easy to submit. Forget about

any other expense that may be claimed; think about the automobile expenses.

Depending on whom you are dealing with, the submission of the requested diary or calendar can be an adventure.

First, mailing information into an abyss and not knowing how long you will wait for a response to the information submitted is nerve-wracking. Then, if the answer is an adjustment due to lack of proper substantiation, you do not have an opportunity to explain. I am of the opinion that certain types of expenses are easier to verify and explain if you can present them in person. So, the next step is to file an appeal.

An appeal, however, can end up in any of the appeals offices, and a “face-to-face” meeting could be via a telephone conference. Telephone conferences are not my idea of an appeals conference. You could request that it be transferred to your local office, but again we are dealing with an agency that is trying to do more with less. I have always tried to deal within the system, and have had successes. But I have also had my share of miserable failures.

One lesson that I learned is to never accept an appeal conference where the only option is to work through the matter with phone conferences. I think that requesting a transfer to your local office gives you the option to meet with the appeals officer if required, and I like to keep all options open.

In addition to the geographic and logistic pitfalls of the correspondence examination, the length of time it takes to review and respond to taxpayers’ responses can be very frustrating. Surely you’ve encountered situations when you respond to a notice, and then 45 days later you get a “Thank you for your correspondence letter. We have been unable to address this matter, but we will get back to you in the next 30 to 60 days.”

Staffing shortages and excessive workloads are now chronic and to be expected with the IRS. The shift to more correspondence examinations does not appear to have alleviated the situation.

The truth of the matter is that unless

you have a slam-dunk type of a case where your client maintains immaculate records, correspondence examinations will be less than ideal.

Phone Resolutions

Say you encounter a situation where one of your clients is contacted to resolve a discrepancy between information reported on the return and thirdparty information available to the IRS. Your first reaction would probably be to call the Practitioner Priority Service telephone line.

How many times have you picked up the phone thinking the matter can be easily resolved if you can only get to a person who will listen and understand?

Most of the time, the listening and understanding once you got through had rarely been a problem. Access to the Practitioner Priority Service has been an exclusive resource for tax professionals and requests related to resolving client-related issues. But now, before you dial, know that reduced training budgets at the IRS may mean the person you initially reach may not have the depth of knowledge or experience that you need.

With one recent inquiry, a 60-plus minute wait revealed that, although the power of attorney was signed properly, the client entered his title as managing partner. The entity I was inquiring about was an S corporation, so that title was not acceptable. Back to square one. Another request to have an account transcript faxed (the issue involved a payroll tax issue, and these transcripts are not available through e-Services) was met with a question about a secure fax.

I answered saying that the fax will come in as an e-fax and that I would have access to it through my computer, only to be told that that was not a secure delivery method. I gave a different number, one that prints out paper faxes, and was asked if the machine was in a room that was secured, and if only I would have access to it for the next 48 hours. That conversation, too, ended without getting the needed information, requiring another call and

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speaking with another representative to get the requested information.

You might call this shopping for the answer. Yes, it is, and sometimes it will be required.

Not all phone contact will be as troubling. I find that certain penalty issues can be easily resolved with a phone call – at least when compared to sending a letter, waiting six months for a reply, and having the reply be a denial of your abatement request that sends you back to the start. For situations that qualify for reasonable cause penalty relief available under Revenue Procedure 84-35 to small partnerships or the First-Time Penalty Abatement Waiver, phone calls may be the way to go. I have been successful many times on the phone getting penalty relief by citing the revenue procedure or requesting the administrative relief provided for by the First-Time Penalty Abatement Waiver.

The criteria set forth in Revenue Procedure 84-35 can lead to reasonable cause basis penalty abatement for late-filed partnership returns. If the answers to all of the following questions are “Yes,” the IRS will abate this penalty: Is the partnership a domestic partnership?

• Does the partnership have 10 or fewer partners? (Husband and wife and their estate are treated as one partner.)

• Are all partners natural persons (other than a nonresident alien) or an estate of a deceased partner?

• Is each partner’s share of each partnership item the same as his or her share of every other item?

• Have all the partners timely filed their income tax returns?

• Have all the partners fully reported their share of the income, deductions, and credits of the partnership of their timely filed income tax returns?

I am always ready during the phone conversation to fax a statement in which each of the criteria questions are

20 AZ CPA y JULY/AUGUST 2015

listed and answered “yes.” This method has worked numerous times.

The First-Time Penalty Abatement Waiver, on the other hand, is an administrative penalty waiver that allows a first-time noncompliant taxpayer to request abatement of certain penalties, including failure-to-file, failure-to-pay, and failure-to-deposit.

This is one of the easier requests to make by phone. The service person evaluates the request using decisionsupport software designed to help IRS employees make penalty relief determinations. It has been reported that this system can be flawed, but if it works and the penalty relief is granted, your mission is accomplished.

Collection

The current IRS collection process involves three possible phases: • A series of computer-generated notices sent by IRS campuses • An automated collections system • Assignment to a revenue officer – if one is available – or placed in a queue awaiting assignment The third item listed can be very frustrating. Like the rest of the IRS, the collection division has to do more with less. In recent years, the number of revenue officers has declined to such an extent that any assignment to an officer could take quite a while.

In one case, a nonprofit client ran into some administrative problems, which led to payroll returns being late and payroll deposits not being timely.

The situation was short-lived and the matter was quickly corrected, but the tax, interest, and penalties associated were substantial. Initially the liability was addressed through setting up an installment agreement, and the amount negotiated was paid monthly.

These payments were beginning to impact the organization’s ability to survive. The IRS was contacted, and a request was made to abate certain penalties. This could not be done.

Next was a request to have the case assigned to a revenue officer so all factors could be examined and something

could be worked out. I was told by the telephone contact that this could only be done if we defaulted on the installment agreement. We did not want to default on the agreement, but I was told that since the entity had an existing installment agreement this case had a low priority for assignment.

Needless to say, we recommended defaulting on the installment agreement, and began the wait to be assigned.

PLLC

Rivers & Moorehead is pleased to announce

Answers on the Web

The IRS website provides a lot of information on numerous topics. It is an effort to resolve some of the information-sharing shortcomings due to the decline in taxpayer services and the reduction of manpower. The IRS e-Services website provides information on subjects such as payments and refunds, credits and deductions, forms and publications, help and resources, identity protection, filing, how to contact the IRS, getting a transcript, and numerous other topics. As with any online search, though, you have to be able to identify what you need, how to organize your search, and then understand what the provided text is talking about. Remember, we are talking about Internal Revenue laws and regulations.

I was told by someone once that the words in the Internal Revenue Code make sense ... until you put them in a sentence.

The relationship between CPAs and the IRS has changed and not for the better. Just remember that you have to play the cards you are dealt, control your frustrations, and learn to like the soothing music while on hold waiting your turn. If you can learn to live with the new normal, that’s terrific. If you want the “service” back in Internal Revenue, make sure your voice is AZ CPA heard.

David Wesner Managing Director CFO Consulting

Eric Wolf Director Valuation Services

Jason Hert Consultant Accounting Services

Jodi Hert Consultant Accounting Services

have joined our firm. www.riversmoorehead.com 398 S. Mill Ave. Tempe, AZ 480.378.2301

James D. Mahoney is a CPA with CBIZ MHM LLC in Plymouth Meeting, PA. He can be reached at jdmahoney@ cbiz.com. This article was reprinted with permission from the Pennsylvania CPA Journal.

JULY/AUGUST 2015 y AZ CPA

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CPA Firms Targeted by Fraud – The Counterfeit Check Scheme

by Steve Koons, CPA, ABV, CFF, ASA

It began with the following website inquiry from a Chinese company using a gmail account: “We would like to retain your firm to help us with business advice, financial and administrative policies, tax and finacial planning. We have a proposed transactions contract agreement for merger & Acquisition, if you are interested we shall forward you the company information and letter of intent for you to run a confict check.”

Note the misspellings and grammatical errors in the above email. Ok, maybe I overlook this since the author may have been in a hurry.

The contact information on the inquiry was the name of an individual, a company name and address, telephone number and a website URL. The message was retrieved by our marketing staff and the inquiry was forwarded to our international tax partner.

22 AZ CPA y JULY/AUGUST 2015

Based on subsequent emails from the contact person, we were informed that the Chinese company had entered into a Letter of Intent (LOI) with an Arizona corporation (the target company) to purchase the target company. We were asked to perform a conflict check on the target company to see if we would be able to perform due diligence investigation services in connection with their potential acquisition. That’s where I came in.

I was suspicious when I first saw this due to the gmail address rather than coming from a company email address.

Also concerning were the misspellings and grammatical errors in the original and subsequent messages. We asked how they found Henry & Horne, LLP. They claimed they were referred by Arizona CPA Referral Service, Arizona Society of Certified Public Accountants.

All of our communications were conducted via email.

I performed the conflict check and some additional research. The Chinese company was in the publishing business according to their website. The target company also had a website indicating it was also in the publishing business, so it appeared to be a strategic acquisition.

Curious though, was the fact that the target company had been dissolved by administrative decision of the Arizona Corporation Commission in 2002 and there was no record of reinstatement.

Well, I thought, my first piece of a due diligence investigation was now complete. I also thought it was curious that the Chinese company wouldn’t have at least verified the target company’s legal status prior to executing a LOI. Oh well, stranger things have happened.

Then I reviewed the LOI. It was a typical LOI containing language setting forth the terms of the acquisition and the due diligence period. However, it also contained an unusual provision.

It seems that the target company owed $650,000 to the prospective buyer for purchases of inventory. The LOI stated

that the $650,000 was to be paid directly by the target company to the prospective buyer’s CPA. We immediately informed our contact that we cannot accept client funds from third parties.

We suggested that they have their U.S. legal counsel handle the payment since they are already set up to handle client trust funds. The prospective buyer indicated they had not yet retained a “bonafide lawyer.”

After completing the conflict check, we issued a letter of engagement (LOE) for the due diligence investigation. We requested a retainer in the LOE as this is our standard practice in non-recurring engagements. A few days later, the prospective client sent an email acknowledgment of their receipt of the LOE and returned the executed LOE via email.

A few days after our receipt of the signed LOE, the prospective buyer sent us another email stating that a check in the amount of $350,000 was being issued by the target company to Henry & Horne, LLP as a partial payment of the debt owed to the prospective buyer.

Here is a copy of the email: Dear Stephen, “We have been notify by the target company account department that they have made a part payment of $350,000 to you and you should receive the payment in few days, this was a part payment of the $650,000 as stated in the LOI. Please once you have receive the payment deposit it and deduct your fee from the sum and this will give us a good note to start off as agreed by our board of directors., we shall forward you our account receivable information for the proceed, they promise to pay the balance within couple of weeks. We are looking forward to working with you, have a nice day.”

The name and contact information was also provided in the signature block on the email.

Again, there are misspellings and grammatical errors in the email. Also, note that the prospective buyer in-

structed us to deposit the check and deduct our retainer from the deposit.

We informed them again that we cannot accept a payment of this nature. They responded that this was their agreement and “…you did read the letter of intent…” And, the balance would be paid “…within couple of weeks, have a nice day.”

I said to myself, “Enough is enough!

This is a scam!”

My additional research turned up information on the Internet Crime Complaint Center (www.IC3.gov), a partnership between the Federal Bureau of Investigation and the National White Collar Crime Center. Below is a notice on the IC3 website regarding a very similar Internet fraud scheme targeting lawyers.

U.S. Law Firms Continue to be the Target of a Counterfeit Check Scheme The IC3 continues to receive reports of counterfeit check schemes targeting U.S. law firms. The scammers contact lawyers via e-mail, claiming to be overseas and requesting legal representation in collecting a debt from third parties located in the U.S. The law firms receive a retainer agreement and a check payable to the law firm. The firm is instructed to deposit the check, take out retainer fees, and wire the remaining funds to banks in China, Korea, Ireland, or Canada. After the funds are wired overseas, the checks are determined to be counterfeit.

In a slight variation of the scheme’s execution, the victim law firm receives an e-mail from what appears to be an attorney located in another state requesting assistance for a client. The client needs aid in collecting a debt from a company located in the victim law firm’s state. In some cases, the name of the referring attorney and the debtor company used in the e-mail were verified as legitimate entities and were being used as part of the scheme. The law firm receives a signed retainer agreement and a check made payable to the law firm from the alleged debtor. The client instructs the law firm to deposit the check and to wire the funds, minus all fees, to an overseas bank account. The law firm discovers after the funds are wired the check is counterfeit.

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Law firms should use caution when engaging in transactions with parties who are handling their business solely via email, particularly those parties claiming to reside overseas. Attorneys who agree to represent a client in circumstances similar to those described above should consider incorporating a provision into their retainer agreement that allows the attorney to hold funds received from a debtor for a sufficient period of time to verify the validity of the check.

If you have been a victim of an Internet scam or have received an e-mail that you believe was an attempted scam, please file a complaint at www.IC3.gov.

This notice was dated March 12, 2012. There was a similar notice dated January 21, 2010 titled “New Twist on Counterfeit Check Scheme Targeting U.S. Law Firms.” In both cases, the fraudster asks that the firm extract the retainer from the payment and then wire the balance. We filed a complaint with the FBI and National White Collar

24 AZ CPA y JULY/AUGUST 2015

Crime Center through the Internet Crime Complaint Center.

I discussed the attempted fraud with the representative for our malpractice carrier. He indicated that he is aware of at least three U.S. CPA firms that were duped by the scheme. One received a check in the amount of $100,000, kept his $5,000 retainer and wired $95,000 overseas. The check was returned by his bank as fraudulent 10 days later and the firm was out $95,000.

I performed an Internet search using the name used by the fraudster in the email and immediately came across the website of a Texas law firm blog post.

At the end of the post was an Internet inquiry dated February 2015 from an individual with the same name and the same company inquiring about legal services requested in connection with an acquisition. I notified the law firm and shared my research with them.

Apparently, U.S. attorneys are still being targeted with the counterfeit check scheme…and so are U.S. CPA firms.

The rest of the story: We did receive a counterfeit check in the amount of $350,000. It was drawn on a Canadian bank. We preserved it as evidence in case the FBI is interested in the case.

Fortunately, Henry & Horne, LLP’s only loss was the time incurred by the professionals who dealt with this matter.

Imagine my surprise three days later when I walked into a meeting regarding another potential due diligence investigation and was greeted by three Chinese nationals. Oh brother! Here we go again! Gratefully, this one turned out to be the real deal!

Be on the lookout for this fraud scheme. If your firm or business has been targeted, I encourage you to report it to the Internet Crime Complaint Center at www.ic3.gov.

AZ CPA Steve Koons, CPA, ABV, CFF, ASA, is a director at Henry & Horne, LLP. and a member of the Arizona Society of CPAs. He can be reached at StephenKo@ hhcpa.com.

ASCPA Conferences Two Conferences in One Day – Attend One or Both, Attend in Person or via Webcast September 11

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8 a.m. to Noon This conference includes national and local speakers who will deliver informative, progressive and dynamic sessions on business valuation.

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Employment A ccounting M anager — Market Enginuity—As the Accounting Manager you will focus on 3 primary areas: Accounting practices, Reporting and Office Operations. While operating with a consultative approach you will advise executive management on accounting best practices, identify issues and recommend solutions – all with the focus of helping advance the organization and working toward achieving short and long term goals. We want to hire the best person for this job who can manage the tactical accounting/ reporting work while being involved in the strategic business initiatives that will impact all 12 of our markets across the country - we work with NPR and PBS stations. https://workforcenow.adp.com/ jobs/apply/posting.html?client=marketeng EXPERIENCED CPA — KARPINSKI, BERRY, ADLER & COMPANY, PLC —Seeking experienced CPA. Camelback Corridor CPA firm is seeking to hire a CPA with near- term partnership potential. The ideal candidate must have ten plus years of experience and a strong tax background in public accounting.

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