AZ CPA November 2011 by ASCPA

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The Arizona Society of Certified Public Accountants

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IRS Pays Whistleblowers Evaluating Clients â&#x20AC;˘ Qualified Plans www.ascpa.com

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CPA NOVEMber 2011

Volume 27 Number 9

Walking Away from a Residential Property—Top Things to Tell Clients

Great advice designed to help your clients if they need to walk away from their residential properties. by Joseph Velez, Esq.

Qualified Plans Equal Substantial Tax Deductions

Features IRS Authorizes Whistleblowers and Pays Them

The IRS will now pay whistleblowers 15 to 30 percent of the collected proceeds. by Kevin Diamond

Re-evaluate Clients Well Before Tax Season

As you meet with clients for 2011 year-end tax planning, keep in mind an easily overlooked, yet highly effective, tax planning vehicle—the qualified plan. by Armando G. Roman, CPA/PFS, MBA

A Virus in the Workplace

Are “viral employees” bringing your organization down? by Bryan Sheldon

Now is a perfect time to screen tax clients before potential problems arise. by Suzanne M. Holl, CPA

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

Chair’s Message by Mark Anderson, CPA

Focus on Members

22 Classifieds

www.ascpa.com

4 AZ CPA y NOVEMBER 2011

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

Mark Anderson Armando Roman Karen Abraham Anita Baker Rob Dubberly Megan Faust Barb Muller Julie Norton David Richardson Craig Robb Elva Vivas David Walser Corrine Wilson Neal Young Kevin Yeanoplos

Immediate Past Chair Julie Klewer AICPA Council Members Jim Buhr Rick Goldenson Chapter Presidents Southern Chapter Northern Chapter Southwest Chapter North-Central Chapter

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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 Telephone (602) 252-4144 AZ Toll-Free (888) 237-0700 Fax (602) 252-1511

Call 1.800.584.4595 Ext. 05 www.accountingpracticesales.com

Gary Hankins, CPA Member Arizona Society of CPAs

www.ascpa.com NOVEMBER 2011 y AZ CPA

Chair’s Message

by Mark Anderson, CPA

Mandatory Audit Firm Rotation On a recent trip to Flagstaff for the Northern Chapter monthly meeting, Cindie Hubiak, president & CEO of the ASCPA, and I participated in an engaging discussion with 18 of our fellow CPAs. One topic that engendered considerable interest and comment was that of mandatory audit firm rotation. CPAs working in public accounting, industry and government all weighed in on this issue with comments generally in opposition of this type of requirement. As a CPA in industry, I listened to the issues raised and questions asked before coming to my own conclusions on this rather controversial topic. I have been in my position as CFO for Delta Dental of Arizona for more than seven years, and we have had the same firm conduct our external audit for that entire time and for several years before I took over the position. We have rotated our audit partner according to our internal policies, which are intended to mirror those adopted by the National Association of Insurance Commissioners in their Model Audit rules. These were modeled after the Sarbanes-Oxley Act requirements. That Act included reforms intended to strengthen auditor independence and improve audit quality. Mandatory audit firm rotation was considered as a reform to enhance auditor independence and audit quality during the Congressional hearings that preceded the Act, but it was not included in the Act. Congress decided that mandatory audit firm rotation needed further study and required the United States General Accounting Office (GAO) to study the potential effects of requiring rotation of public accounting firms. The GAO did the study and focused on the question of whether the independence of a public accounting firm auditing a company’s

6 AZ CPA y NOVEMBER 2011

financial statements is adversely affected by a firm’s long-standing relationship with the client. The GAO concluded that mandatory audit firm rotation may not be the most efficient way to strengthen auditor independence and improve audit quality considering the additional financial costs and the loss of institutional knowledge of the public company’s previous auditor of record. The thought of rotating firms every few years causes me serious concern. The added costs involved in a new firm learning and getting up to speed on our industry and company specific issues would be significant. So how do we go about ensuring auditor independence? The GAO believes that audit committees, with their increased responsibilities under Sarbanes-Oxley, can play an important role in ensuring auditor independence. To fulfill this role, audit committees must themselves maintain independence and have adequate resources. Finally, for any system to function effectively, there must be incentives for parties to do the right thing, adequate transparency over what is being done and appropriate accountability if the right things are not done. The audit committee chairs of Delta Dental have taken this to heart. Over the last several years they have been

directly involved in meetings with the audit firm to discuss independence, controls testing and significant/critical audit areas. Our audit committee chairs have made it clear to the auditors that they want a direct line between them and the firm for any concerns that may arise during the audit. As a CFO, I find this level of involvement by the committee chair and the committee to be a significant benefit to the organization and one that adds value and credibility to the audit in a much more efficient way than rotating the audit firm. I respect the opinions of all CPAs on this issue and certainly understand the arguments for and against audit firm rotation. However, as a CFO with a highly functioning audit committee, I agree with the GAO that there are more cost effective ways to strengthen auditor independence and AZ CPA improve audit quality.

Focus on Members Roman Kepczyk, CPA, has been listed as one of the Top 100 most influential people in accounting by Accounting Today.

David Gray

Clifton Gunderson announced four promotions in the Tucson office: Maggie Zhou, CPA, tax senior manager; Janeé Johnson, CPA, tax manager; Cathy Poore, CPA, tax manager; and José Martens, CPA, assurance manager. Donn R. Merrill, CPA, is now the founding principal at Merrill Consulting in Scottsdale. The firm focuses on healthcare management and consulting services to physicians/medical groups and health plans covering commercial, Medicaid and Medicare. Yeanoplos

Nancy Wilson of Heart

CPA’s Photos Featured in Tucson Shot Rock Exhibition ASCPA member Kevin R. Yeanoplos, CPA/ABV/CFF, ASA, of Brueggeman and Johnson Yeanoplos, P.C. in Tucson recently had a series of his concert photographs featured in Tucson Shot Rock. More than 30 Tucson photograhers took part in the photo exhibition of Tucson photographers and their favorite rock photos this October. Photos were also featured in the Tucson airport where the exhibition was promoted. Aside from his work as a CPA in the business valuation field, Yeanoplos also writes a concert column online as the National Concert Examiner—www. examiner.com/concerts-in-tucson/kevin-yeanoplos.

Congratulations to iPad2 Winner Louise Vaccaro, CPA ASCPA member Louise Vacarro, CPA, was the lucky winner of our website scavenger hunt, taking home the ultimate prize of the iPad2. Other winners include: Dawn Sabers, CPA, winner of the $50 Visa Gift card; and movie ticket winners: Brenda Hasler, CPA, Jonathan McGee, CPA, Syndia Reeder, CPA, Stephanie Schwencer, CPA, and Mark Springsteel, CPA. Thank you to everyone who took the time to check out our new website and take part in the scavenger hunt.

ASCPA Visit to Arizona Department of Revenue: (l to r) Michael

Lemme, Ed Zollars, Cindie Hubiak, David Raber, Director John Greene, Vincent Perez, Adela Jimenez and Anthony Forchino.

NOVEMBER 2011 y AZ CPA

tools to inspire families and children to create security and build wealth. As founder of Pay Yourself First, LLC, and co-founder and former CEO of the Rich Dad Company, Lechter’s earned continued acclaim for her work. She coauthored the popular Rich Dad Poor Dad series; and most recently, in conjunction with the Napoleon Hill Foundation, released two new books in the Think and Grow Rich series: Three Feet from Gold and Outwitting the Devil.

Lechter Participates in Financial Literacy Week in Uganda, Authors New Book International best-selling author, entrepreneur, advocate and speaker—and ASCPA member—Sharon Lechter, served as a keynote speaker for the sixth annual Financial Literacy Week in Kampala, Uganda, held in September. Uganda’s Financial Literacy Week’s mission includes promoting financial discipline such as saving and investing. The ultimate goal is to eradicate the cycle of poverty, ensuring sustainable intergenerational wealth and financial freedom. “It doesn’t matter what language they speak, or what currency they use, parents everywhere want their children to succeed,” says Lechter. “The need for financial literacy is a global issue and I applaud Uganda for leading the charge in providing financial education to its young people. It is an honor and a privilege to participate in the Sixth Annual Financial Literacy Week.” A passionate advocate of financial education, Lechter has focused her efforts on developing Sharon Lechter (pictured here with Cindie Hubiak) had more than 70 people attend her book signing at Barnes and Noble on September 27.

8 AZ CPA y NOVEMBER 2011

CFO Alliance meeting: Cindie Hubiak, CPA, ASCPA President & CEO, is joined by Alejandro Fuentes (left), CFO of Raza Development Fund, and Tim Propp, CPA, CFO of Thunderbird School of Global Management. The group of CFOs learned about “The Strategic CFO” from Thunderbird Professor Ramaswamy.

Creative Sponsorship—Carolyn Sechler, CPA, comes up with a fun way to engage members at the Not-for-Profit Conference with her “Fiscal Psychiatric” booth reminiscent of the Charlie Brown cartoons. ASCPA member Alexander Cudzewicz, CPA, president of Oak Brook Management Corp., used his booth at the Financial Planning Conference to promote the Welcome to America Project, a local charity assisting refugees.

IRS Authorizes

Whistleblowers and Pays Them

A Bit of History The Tax Relief and Health Care Act of 2006 (the Act) enacted significant changes in the IRS award program for Whistleblowers. The IRS shall pay awards for information provided to the Internal Revenue that substantially contributes to the collection of taxes, penalties and interest. The award is available for any underpayment whether due to fraud or noncompliance with a tax position that the IRS disagrees with. The IRS has long held the authority to pay awards to Whistleblowers. In fact, the origins of the whistleblower legislation relates back to the Congress of 1867. The big difference was the old law as now seen in Internal Revenue Code (IRC) Section 7632(a) allowed the Secretary of the Treasury to pay such amount as he deems necessary “for detecting and bringing to trial and punishment person guilty of violating the internal revenue law or conniving at the same.” This meant Whistleblowers were paid at the discretion of the Secretary of the Treasury. The implementation of IRC Section 7632(b) made a fundamental change to the IRS informant awards program. The key change in the law was the addition of this section under which awards are no longer discretionary! The new law says that Whistleblowers “shall receive 15 to 30 percent of the collected proceeds.” In addition, the amendment gave the whistleblower certain rights of appeal. That appeal is limited to the U.S. Tax Court. Finally, the IRS established a Whistleblower Office reporting to the Commissioner of the IRS to implement the law. The primary purpose of the Act is to encourage people with knowledge of significant tax non-compliance to provide that information to the IRS. Many individuals who apply for this reward often claim to have inside knowledge of the transactions upon which they are reporting.

Technical Requirements A Whistleblower must meet several conditions to qualify for the award program. Generally, the information must: •Relate to a tax noncompliance matter in which the tax, penalties, interest, additions to tax and additional amounts in dispute exceed $2,000,000; and •Relate to a taxpayer, as an individual taxpayer, whose gross income exceeds $200,000 for at least one of the tax years in question.

by Kevin Diamond

NOVEMBER 2011 y AZ CPA

Master of Accountancy and Master of Taxation

If the information meets the above conditions and substantially contributes to a decision to take administrative or judicial action that results in the collection of tax, penalties, and interest, then the IRS will pay an award of at least 15 percent but not more than 30 percent of the collected proceeds resulting from administrative or judicial actions or from any settlement in response to an administrative or judicial action.

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The maximum award can decrease to 10 percent for cases where it is determined that the information was disclosed in certain public information sources. Or the reward may also be reduced if the IRS determines that the whistleblower planned and initiated the actions that led to the underpayment of tax.

Types of Tax Fraud The types of fraud can vary greatly from each of the three types of groups: individual taxpayers; corporate taxpayers; and abusive or fraudulent tax professionals. Below are some examples of each type of fraud:

Individual Taxpayers: •keeps two sets of books to track income and expenses for the purpose of hiding income; •claims false deductions or expenses; •intentionally declares the false income or knowingly changes the income; •makes overstatement of the deduction amount; •conducts the business deals by using false names; •declares false amounts income and expenditure in the books of accounting records; •transfers or conceals his/her assets or income; •hiding income in off shore accounts; •records personal expenditure as business expenditures; or •intentionally does not file the tax returns.

Corporate Taxpayers: •keeps two set of books to track income and expenses for the purpose of hiding income; •fails to keep records; •destroys evidence such as records and/or receipts; •lies during an IRS audit; •uses a fake social security number or tax identification number; •hides income in off shore accounts; •Pyramiding—collects taxes from employees and failing to pay them to the IRS; •unreliable third party payers—uses a shady payroll service, which may fail to pay collected taxes to the IRS; •Offshore Employee Leasing—attempts to redirect employee status and wages to avoid employment tax; •misclassifying worker status—gives employees the title of independent contractor in order to avoid paying the related taxes; •pays employees in cash—attempts to evade taxes by paying employees in cash without reporting the wages to the IRS; •filing false returns or failing to file returns that are due—intentionally misreports income or failing to report wages; or •misreports officer compensation— misreports officer compensation as S Corporation Corporate Distributions or other such fraudulent reporting.

Abusive Tax Professionals: •who claim they can obtain larger refunds than other preparers; •who base their fee on a percentage of the amount of the refund; •who advocate the use of abusive “Offshore Accounts” as a means for not having to report income; or •who advocate the use of abusive “tax shelters” to avoid taxes and create what will be represented as “legitimate losses to off-set against taxable income.”

How to Report Tax Fraud If you know or suspect that you are aware of significant tax fraud, the best thing that you can do is to find the services of a competent tax attorney or pos-

sibly an experienced CPA in this area. The Advisor will be of great assistance in helping you understanding the issues and procedure for filing a Claim for a Whistleblower’s Informant Award. The claim must be filed with the IRS and there are many technical requirements that need to be met in order to qualify as a Whistleblower who is entitled to the Informant’s Award. The Advisor should: •Assist you in understanding the tax issues in your case; •Determine if the issues are, in fact, fraudulent actions that would lead to the collection of taxes, penalties and interest; •Assist in the determination of whether the case has the possibility to qualify under the rules requiring a $2,000,000 minimum for recovery and if the individual taxpayer had earned at least $200,000 in one of the years at issue; •Assist in the filing of the required forms and documentary evidence to substantiate the Whistleblower’s Claim

with the IRS; •Frame the tax issues in a manner that the IRS will understand the legal and tax issues related to the Noncompliant Taxpayer; •Communicate and cooperate with the IRS in pursuit of the collection action and work with the IRS until a determination is made; and •Represent the Whistleblower in U. S. Tax Court in the event an appeal of determination is required (this may require not only an attorney but one who is licensed to practice before the U.S. Tax Court.).

whistleblower received $4.5 million. The range of an award under IRC Section 7623(b) for a recovery is from 15 to 30 percent of the total amount recovered. In the above case, the IRS award represented 22 percent of the funds recovered. Any appeal of the award percentage will be limited to the U.S. Tax Court. All awards issued by the IRS will be subject to current federal tax reporting and withholding requirements ,and the Whistleblower will receive a Form 1099 or other form as prescribed AZ CPA by law.

Informant Awards

Kevin Diamond is licensed by Massachusetts as an attorney and CPA, along with the U.S. Tax Court. Diamond has a national IRS whistleblower practice and has spent his career working on issues related to fraud as a forensic CPA, an investigator for the Massachusetts Securities Division, an Investigation Specialist at FDIC and lawyer for a large Boston firm before starting his own practice. See his website at kevindiamond.com.

The IRS awards will pay significant amounts of money to the Whistleblower. In April of 2011, the IRS paid out the first award to a whistleblower, who was an in-house accountant who raised a red flag about a tax lapse that his employer ignored, which lead him to tip off the IRS. The accountant’s tip netted the IRS $20 million in taxes and interest, of which the accountant/

AC CCOUNTANT MALPRACTICE

WR RONGFUL LEVY DEFENSE

OFFFERS IN COMPROMISE

REEF EFUND CLAIMS

TAX COURT AND FEDERAL COURT REP EPRESENTATION

REEFUND LAWSUITS

IRS APPEALS TR RUST FUND PENALTY DEFENSE

INN NNOCENT SPOUSE CLAIMS REEPRESENTING CPAS & CLIENTS TH HROUGHOUT ARIZONA

AU UDIT REPRESENTATION TEFRA AUDITS TE

LAW W OFFICE OF F ARTHUR R L. L WEISS, P.C.

5363 East Pima Street, Suite 101 | Tucson, AZ 85712 (520) 319-9057 | weiss60@msn.com www.ArtWeissLaw.com

NOVEMBER 2011 y AZ CPA

SOMEONE WALKS INTO YOUR OFFICE WAVING A BADGE AND A SUBPOENA

“LET’S TALK ABOUT YOUR NEXT MOVE” Ronald Parisi, CPA, JD, EVP of Risk Management for CAMICO, discusses the risks faced by CPAs every day.

OK, Ron, what’s the best strategy in a case like this? Accept the subpoena or summons, then tell this person you will respond once you consult your risk advisor. Whatever you do, don’t spill the beans. But doesn’t a subpoena mean they have a right to ask questions and search our ﬁles? Not necessarily. Providing information now, without proper counsel, could put you at risk of a lawsuit later. A subpoena is just a legal request for information. It may not even be enforceable. But whatever the case, the court allows you time to respond properly. OK, so I don’t spill the beans. What’s the next step? Call the CAMICO Hotline. CAMICO’s specialists have been through this with hundreds of other CPAs, and they will guide you through lawful compliance without compromising your professional standards or the right of privacy between you and your client. But legal counsel is expensive. How much is this going to end up costing me? As a CAMICO policyholder, there’s no extra charge for legal advice and representation, and you can call our Hotline as often as you’d like. Plus, you may be entitled to cut your deductible in half if you report a matter before it becomes a claim.

Not insured by us? Give CAMICO a call, and we can start the conversation about lowering your risk – and your stress level – today. See a video of Ronald Parisi sharing how CPAs should handle subpoenas and summons at www.camico.com/subpoenas

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Scott Schmidt Phone: 602.264.5533/800.224.2264 scott.schmidt@stuckeyinsurance.com www.stuckeyinsurance.com

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CAMICO professional liability insurance is recommended by the Arizona Society of CPAs.

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to uncover the source of the problem could help, so don’t ignore the warning signs. If a client continually fails to return your phone calls, or threatens to sue, you should take swift action to remedy the situation, or disengage before the situation worsens.

The “Antacid” Client

Re-Evaluate Clients Well Before Tax Season by Suzanne M. Holl, CPA Now is a good time to screen tax clients for potential problems. There is still ample lead time before tax season for a client to replace you in the event you decide to disengage. Practice management and risk management are often one and the same concept, and client screening is an excellent example of such convergence. Not only is it the first step in an effective loss prevention program, but client screening can be used to identify less desirable clients that may be keeping your firm from developing more desirable clients. Re-evaluate your relationships with clients on a regular basis—at least annually. The following checklist highlights some of the warning signs that it may be time to disengage from certain clients—ideally after they have paid their bills.

Late Payment, Difficult Client Does the client pay your firm on time? If not, find the reason for the payment problem and decide whether or not you want to retain the client. Pay special attention to difficult or manipulative clients who do not return your phone calls, are otherwise non-responsive, and often cause delays. Difficult behavior should be explored. Take swift action on your own behalf to investigate.

Withheld Information When a client does not provide the information you need to complete an engagement, carefully consider the problem. Is it sloppy record keeping, or is the client deliberately delaying or withholding information? Be cautious when it appears that documents are being deliberately withheld, or you are urged by a client to proceed with work without having proper documentation. This is a red flag, and repeated delays could be the result of unethical or illegal activity.

Deteriorating Relationship with Client Abrupt changes in a client’s behavior may be a sign of impending liability issues, severe financial problems, substance abuse, or other personal problems. Trying

Some clients may be great for your firm’s financial condition, but the money they bring in simply isn’t worth the emotional turmoil they create for you and your staff. These are the clients who are nasty to your staff, make unreasonable demands, are non-responsive, complain excessively, argue, and are generally obnoxious. In such cases, you have to ask yourself: Is this client worth keeping? Sometimes, the answer is that “life is too short.”

Changes in Client’s Business When a client’s business changes, you may need to re-evaluate the relationship. A client may, for example, buy a business that requires work you are not qualified to perform. Or a client may decide to sell all but a small portion of the business, and you may not wish to work for such a small entity. A startup client may grow and reach a point when it plans to go public, and you may not want to perform the public work. Such changes can alter the professional relationship and lead you to decide to disengage.

Changes in Your Firm When your firm changes, you may also need to change your client base. The loss of a partner with an area of expertise that the other partners don’t possess will require a decision by the firm regarding continued service to the former partner’s clients. You may decide that you no longer want to continue performing a particular type of work. Or you may decide to grow your business in new directions. Review your client base whenever your firm changes in order to determine whether or not all existing clients still fit the firm.

Potential Conflict of Interest Consider all client situations carefully

NOVEMBER 2011 y AZ CPA

Conﬁdential Business Sales Locally Serving CPAs & Businesses in Arizona

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MBFC_Arizona_CPA_Assoc-RGipple.indd 1

3/21/2011

in an effort to spot potential conflicts of interest, which may affect your objectivity or independence—even if you are not engaged to do attestation work. Examine potential or actual conflicts of interest from a broad point of view, considering the client’s perspective as well as those of other owners, investors, partners, beneficiaries and spouses. Troublesome or emotionally charged scenarios can include a partnership break-up, a trust, bankruptcy, merger, divorce, or anything else that involves opposing or unhappy factions. In addition to being alert to these warning signs, protect yourself further by educating your clients on their responsibilities within the relationship. Let them know what your responsibilities are to them and what they can expect. Make sure your staff understands that they should inform you of any problems they have with clients. Keep notes and document conversations, advice, meetings, requests for information, decisions, and any payment problems or changes in a client’s behavior. Docu2:29:52 PMmentation could be an important part of deciding whether or not to disengage.

Disengagement Letters

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(480)

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When you decide to disengage, seek to terminate the relationship professionally and formally, in writing. Your disengagement letter should always contain clear statements, a description of your work, and a list of any due dates or filings. Done effectively, a disengagement can leave your client feeling that you have acted in the best interest of both parties. Effective communication is a key factor in any CPA-client relationship, and when you work to stay informed and in control, you are safeguarding your firm. In the end, disengaging is simply good practice management, and knowing how to do it skillfully and professionally will help you grow your practice and AZ CPA avoid liability. Suzanne M. Holl, CPA, is vice president of loss prevention services with CAMICO (www.camico.com).

Walking Away from a Residential Property Top Things to Tell Clients Don’t look now, but just when you thought things couldn’t get worse, home prices have resumed their steady glide downward, leaving people wondering if it is time to “jump ship” and walk away from their underwater home. The usual suspects of real estate data gathering: Core Logic, Case-Shiller and RealtyTrac—tell us that we should soon see home values in the Valley dip below the previous record low from back in May, 2009. Clearly, the current patchwork system of weak government and lender-sponsored programs to address the existing, or more accurately stated, the continuing mortgage crisis, is not working. As CPAs, for at least the next year or two, you are sure to continue to get desperate pleas for assistance and guidance from clients. What follows is a very brief outline of answers to the most common questions likely to be posed clients when they are considering walking away from their home. It Seemed like a Good Idea at the Time

by Joseph Velez, Esq.

Clients with Timeshares—There are generally two types of timeshares. In the first type, an owner holds a time share interest through a points based account system. In the second type, the owner holds an interest in a specific property. “Points based” timeshares are the problematic ones because when one forecloses on such a property, the owner will face liability, as well as whatever other breach consequences existed in the financing contract with the timeshare company. In contrast, “property based” timeshares follow the same general rules as if you were foreclosing on real

NOVEMBER 2011 y AZ CPA

property, namely that when a timeshare is foreclosed via trust sale, the lender (or timeshare association) cannot seek a deficiency against the former owner.

purchased, and when this is the case, the HELOC lender does have the right to pursue the former owner for a deficiency.

information, such as asset information. There are serious civil as well as criminal laws that may be implicated.

All’s Well that Ends Well

Resist the Parting Shot

You should prepare to minimize credit harm. Whether you choose to short sell or foreclose, your credit score will tumble significantly. My office always recommends that a client acquaint themselves with how to rehabilitate their credit well before they actually start the foreclosure or short sale process since there are numerous pre-emptive tactics they can take that will help cushion the credit blow.

Foreclosure often prevents a bank from pursuing a homeowner for a deficiency liability. Here’s a simple but very accurate way to assess your client’s situation. Because almost all residential foreclosures in Arizona are done through a deed of trust sale, then the lender will never have a claim against the former owner for deficiency—even if the loan was refinanced, such as a non-purchase money loan. This protection applies even if the homeowner is an investor. However, there is one catch— the home must be either a single family home, condo or duplex, on 2.5 acres or less and, it must have been lived in.

To Be Forewarned is to Be Forearmed If you maintain a bank account with the same lender that has your mortgage, you may be at risk to having your bank account offset prior to the foreclosure. What most don’t realize is that when you open a savings or checking account, buried deep within the terms and conditions form which you signed is that you agree to allow the bank to offset debts owed to it. And it’s riskier if your money is in a credit union. The safest approach is to assume that your money is not safe and open up a new account elsewhere.

Enjoy the Ride Staying in home until the foreclosure auction—As has been widely reported, it can take a lender anywhere from seven to 12 months to foreclose on a home. The benefit is obvious—the homeowner gets to live rent/mortgage free for the better part of a year.

“I’ll Be Back” HELOCs (home equity credit lines) do pose a deficiency liability problem. As is most often the case, HELOC’s are originated after the home was

16 AZ CPA y NOVEMBER 2011

Don’t strip or waste property. Investor owners who do this might simply want to minimize losses by stripping valuable fixtures and improvements like spas, A/C units, etc. This is called “waste.” Lenders can sue homeowners for waste if such actions lower the value of the home. As a general rule, if taking the item from the home requires the use of tools, then it will probably be considered a fixture and thus it would not be permissible to remove the item, even if the homeowner paid for it and installed it.

Accident Waiting to Happen Short sales could lead to liability. Not all lenders will offer to completely relieve the seller/homeowner of the responsibility of paying off the balance of the loan simply because they have agreed to allow the property to be sold. In some cases the lien holder could request that the homeowner sign a promissory note to pay back some or all of the difference. Or the lender could include troubling language in the short sale approval such as stating that the lender reserves its right to pursue a deficiency. This open-ended provision affords a strong argument to an aggressive lender that since the Arizona anti-deficiency statutes grant protections only in foreclosures, such protections are not available to a seller in a short sale.

Oh What a Tangled Web Don’t misrepresent financial information when pursuing a short sale or loan modification. Mortgage fraud is the intentional misstatement, misrepresentation, or omission by an applicant or other interested party, relied on by the lender or underwriter to provide funding to a mortgage loan. The temptation, and thus the danger, is in deliberately providing inaccurate information to the lender, or deliberately omitting material

Know Where you Stand

A Fresh Start Bankruptcy should be considered if problems are greater than just an underwater home. I can’t tell you how many times clients come in to discuss their options when they are deciding between keeping or letting go of their home, only to discover that the home isn’t the problem, but just the symptom of a greater problem—namely, too much other debt. But first let’s debunk a myth: If you did want your home, you can keep it if you file a Chapter 7 bankruptcy. And creditors are becoming much more aggressive in their collection efforts against borrowers and the number of these suits filed nationwide by debt collectors are exploding. If your client owes a creditor, credit card company, vendor, etc., sooner or later, the matter will probably escalate to a lawsuit and then a judgment. For the most part, these judgments, as well as wage garnishments, can be extinguished through a bankruptcy.

The Gift that Keeps on Giving Staying in the home after the foreclosure—A common practice in Arizona is for the new owner of a foreclosed home to offer the former owner cash to vacate the premises. This practice, generally referred to as “cash for keys” or “relocation reimbursement,” is basically a polite term for “get out of my house and don’t damage it,” and can often net cash to the former homeowner anywhere from $1,500 to $3,000.

Lay Your Cards Out on the Table If you’re a landlord and you’re planning to strategically default, you may still rent the home. However, upon notice of trustee sale, you must disclose this fact to the tenant. (See Arizona Revised Statute sect. 33-1331.)

Rights of Tenants after a Foreclosure Federal law protects tenants after a foreclosure. Currently, tenants cannot be evicted immediately after a foreclosure, but instead may be able to live out the full term of their lease. If the new owner of the home does not intend to utilize the home as a primary residence, then the tenant must be given the option of staying in the property for the full remaining term of the lease. If however, the new owner intends to use the property as a primary residence, then the new owner must give the tenant 90 days to vacate.

Last But Not Least Pay HOAs and Assessments, Pay insurance, but Do Not Pay Property Taxes—The homeowner must pay the HOA fees and assessments until the home is actually sold at the foreclosure. Continue to pay your home owners insurance. Our firm recommends that upon deciding to foreclose or short-sell, you immediately contact your insurance carrier and request that they bill you directly. Keep in mind that this insurance coverage does more than simply cover the home—it also protects you against liabilities. Property taxes are liens on the property, which means that whoever later buys the home must bring current the “arrear” property taxes. So the advice to a homeowner who is strategically defaulting is, do not pay the property taxes. AZ CPA Joseph Velez is an attorney in Scottsdale and a member of the ASCPA. He may be reached via email at jvelezesq@ me.com or (480) 710.5079. This information is intended for informational purposes only and should not be construed as legal advice.

Order Your 2012 Arizona Tax Guide

Order the only comprehensive guide on Arizona taxes from the leaders in tax education, the ASCPA’s Phoenix Tax Workshop. Tax experts Ed Zollars, Ira Feldman and Pat Derdenger are contributors to the guide. The Arizona Tax GuideTM includes: Arizona Income Tax, Sales and Use Tax, Arizona Property Tax, and Unclaimed Property in a printed book or a pdf document. Pre-order by Dec. 15, 2011 and save. Spiral-Bound Book: Pre-Order by Dec. 15, 2011 Members of ASCPA, Phoenix Tax Workshop, State Bar of Arizona or Enrolled Agents: $79 Nonmembers: $99 After Dec. 15, 2011 Members of ASCPA, Phoenix Tax Workshop, State Bar of Arizona or Enrolled Agents: $89 Nonmembers: $109 Electronic PDF: Members of ASCPA, Phoenix Tax Workshop, State Bar of Arizona or Enrolled Agents: $79 Nonmembers: $99 *Call 602-324-4743 for special pricing on orders of five or more.

Go to www.ascpa.com/taxguide to order

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Qualified Plans Equal Substantial Tax Deductions by Armando G. Roman, CPA/PFS, MBA As you meet with clients for 2011 year-end tax planning, keep in mind an easily overlooked, yet highly effective, tax planning vehicle—the qualified plan. For a business owner in the right situation, a qualified plan can dramatically reduce this year’s income taxes, put money safely away into a creditor-protected trust, and grow tax deferred income—letting Einstein’s eighth wonder of the world—compound interest,work its wonders for many years to come. Many clients have some form of retirement plan established, the more common being the 401(k). In the right situation, a defined benefit plan can have a significant impact on a client’s tax liability. A newer version of the defined benefit plan is the cash balance plan, also known as a hybrid plan. A cash balance plan is a type of defined benefit plan that allows for hypothetical individual accounts similar to a profit sharing plan. However, unlike profit sharing plans, cash balance plans allow for higher deductions/contributions than the normal $49,000 annual limit. For smaller employers, defined benefit and cash balance plans can be designed to 401(k) Age Deferral Owner 62 $22,000 $ EE 1 34 EE 2 31 EE 3 24 $22,000 $

Safe Profit Harbor Sharing 7,350 $ 4,900 1,500 2,250 1,200 1,800 1,050 1,575

Defined Benefit Totals $241,000 $ 275,250 515 4,265 340 3,340 190 2,815

11,100

$ 242,045 $ 285,670

$10,525

provide flexibility in the amount that is contributed from year to year. With a safe harbor 401(k) plan in place, a defined benefit plan can be added at little additional cost to the employer. The IRS allows an employer to combine all retirement plan contributions and test those contributions together as if they came from one plan. When demographics are right, 80 percent or more of company contributions can be allocated to the owner. This means that a $100,000 contribution to the retirement plans (combined profit sharing and defined benefit) puts $80,000 or more in the business owner’s account. The $100,000 company contribution is fully deductible in 2011 even though actual funding may occur as late as September 15, 2012. The graph on this page is an example of an existing safe harbor 401(k) plan which allows the owner a salary deferral of $22,000 (catch-up contributions allowed at age 50). The safe harbor allows the owner to maximize his own salary deferral whether or not other employees defer wages into the plan. With the addition of a profit sharing and defined benefit plan, the company contributes an additional $252,572 of which 96 percent goes to the benefit of the owner. The $252,572 is a new fully deductible business expense that, at a 35 percent personal tax rate, results in a tax savings to the business owner of approximately $92,000. Do this three years in a row and the owner saves over $250,000 in taxes. In a cash balance plan, the employer guarantees that the employee will get credited a specific earnings rate on monies put in the plan. The employer chooses the rate and may later amend the plan to modify the rate. Since the employer is obligated to pay employees a guaranteed rate of return, the employer should carefully consider how those earnings will be achieved. Life insurance contracts often have guaranteed fixed rates of return which may help meet the employer’s obligation in a cash balance. Life insurance in a qualified plan may be viewed as a double-wrapper—tax-free vehicle in

NOVEMBER 2011 y AZ CPA

a tax-deferred wrapper—but consider the long-term goal of a guaranteed rate of return to see how life insurance may help achieve the goal. Annuities pose the same double-wrapper issue but, considering market performance over the last 10 years, annuities with guaranteed minimum rates of return may help meet the employer’s obligation. Talk with your investment advisor. When the business owner owns more than one company, engage appropriate counsel to determine inclusion or exclusion in the qualified plan. Rules mandate that employees of controlled/ affiliated companies be included in the plan. Flawed plan design can be costly and harmful. You want to be certain that tax deductions won’t later be disallowed. Inadvertently excluding employees from the owner’s other company could cost thousands of dollars of mandatory unexpected contributions and could severely impinge upon cash flow. A good plan designer or ERISA attorney can be invaluable. According to Henry DeSpain, prin-

cipal of Matthews, Gold, Kennedy & Snow, a designer and administrator of qualified plans, a defined benefit plan should be viewed as a minimum threeyear obligation on the business. There must be sufficient cash available to fund the plan annually, although with adequate advance notice, a plan may be frozen thereby removing the funding obligation for a particular year. For employers who have profits and cash today, yet remain cautiously optimistic about 2012, they can create the qualified plan in 2011, fund it with cash on hand, then immediately freeze the plan to eliminate the 2012 funding obligation. The plan can later be unfrozen; if the business owner chooses to do so, allowing time to determine if sufficient profits and cash exist for a 2012 contribution. A defined benefit and/or profit-sharing plan may be implemented for a calendar year company as late as December 31. There is still time to make full use of this powerful tax reduction tool. A qualified plan can have a substan-

tial impact on reducing a client’s income tax liability this year. It is a tax deferral mechanism, not a tax elimination mechanism. When monies eventually come out, they will be taxed at tax rates in place at that time. Since it is likely that tax rates will be higher in the future, long-term tax planning would suggest that a best case situation is one where a client makes both pre-tax retirement contributions (i.e. qualified plan) and post-tax contributions into a vehicle that allows for tax-free withdrawals (i.e. Roth IRA, life insurance contract). But, for a 2011 tax reduction strategy, a qualified AZ CPA plan is hard to beat. Armando G. Roman, CPA/PFS, MBA, is managing principal of AXIOM Financial Advisory Group, LLC an investment advisory firm. He specializes in wealth preservation and money management strategies for affluent, high net worth families and the businesses they own. He may be reached at (480) 483-1031 or a.roman@axiomcorp.com.

Problem with the Board? Contact: Former Accountancy Board Member

D. Jay Ryan Attorney at Law City North 5415 E. High St., #200 Phoenix, AZ 85054 (623) 937-3737 or (602)840-8075 (fax) Free Telephone Consult Mr. Ryan is a former Assistant Attorney General who represented the Board from 1970-72. The Board’s first lay member/ President (1974-79); Law Committee (1983-1998) ASCPA Honorary Member OTHER LICENSING AGENCY EXPERIENCE

20 AZ CPA y NOVEMBER 2011

We All Benefit From a Larger ASCPA We are asking for your help to spread the word about the rewards of being part of the ASCPA. If you know of a CPA who is not a member, please encourage them to join. As a token of our appreciation, you will receive two movie theater tickets for every CPA you refer who joins. We thank you for all you do for the profession. Please contact José at (602) 324-4741 or jherrera@ascpa.com for more information.

A Virus in the Workplace by Bryan Sheldon There are two types of viral infections that can plague the people within an organization. Many of us attempt to safeguard our organizations against the first type of viral infections by sending people home if they are not feeling well, offering sick days, recommending a healthy lifestyle and offering vaccinations for common infections. When one of these viruses gets into an organization, the result can be a few sick days used and the purchase of a get well card. The second type of virus has a much larger impact on the people and the bottom line of an organization. This type of virus I am referring to is a virus employee. What is a virus employee? A virus employee is a person that causes contamination, disruption and unrest in the organization by: bullying, bad mouthing, sabotaging, provoking, undermining and insulting fellow employees in the organization. For example, a virus employee may go into other employees’ offices and gripe about leadership or other employees. The virus employee may also publicly address private issues or discriminate against a subset of employees. Although virus employees cause difficulties within an organization in many ways; the results for the behaviors the virus employee engages in are the same. Virus employees produce: decreased employee morale, decreased trust in leadership, decreased productivity by employees, psychological unrest and good employees leaving the organization. You might be asking yourself “why?” Why are there employees who deliberately become viruses within an organization? The answer is I don’t necessarily think they do. Having interacted with several employees (and owners) that I consider to be viruses, they have not set out to deliberately destroy the company; rather they perceive their behavior as warranted and believe they are somehow helping the organization or doing no wrong. Psychology calls this making a Type 1 error or a false positive; where the employee believes the targeted employees are actually bad for the organization when actually the targeted employees are not. This process of making Type 1 errors has most likely evolved within our species as a safety mechanism to keep us vigilant of possible dangers; however, in the workplace these errors can cause an employee to become a virus. The behaviors evoked by making this type of error become intermittently rewarded within the work environment and therefore persist. So what do you do with a virus employee? Many times a virus employee has some good qualities about them such as; they deliver great external client service. However, their strengths in one area do not make up for the difficulties they cause internally. Leadership must deal with the situation, the rest of the employees are counting on it! Make a determination on whether an attempt should be made to save the employee or if the employee should be immediately terminated. If the decision has been made to save the employee, follow these recommendations: 1. Isolate the virus. Make sure the employee has little to no interactions with others while you attempt to resolve the situation. This may mean asking his/her fellow

employees to limit interactions with the person and ask the viral person to only come talk to you or other leaders. 2. Discuss the situation. Meet with the virus employee to discuss the specific behaviors they are engaging in that have caused the situation and let them know what they are doing is unacceptable within your culture. Let them know the affect they are having on the company and his/her fellow employees. 3. Develop a plan for recovery. This person has a lot of recovery to make within the organization if they will be able to recover at all. In severe instances, employees in the organization will never trust the person again. If recovery cannot happen, it is better to fire the employee now and save the culture of the organization. 4. Monitor progress. Have regular meetings with the virus employee and others to monitor progress and the rebuilding of relationships. A viral employee has negatively affected the culture of the organization and it is important to get feedback from people within that culture to determine if the plan is working. 5. If it’s not working, terminate the employee. If the virus employee is not making progress in recovering with fellow employees or the employees don’t feel like the person is making progress; then it is time to get rid of the problem. The bottom line is; letting a virus employee remain in your culture will kill it. Don’t let one person ruin what has taken you years to build. Virus employees cause much more harm than they do good within an organization. Although firing an employee is hard, sometimes you have to make the hard, right choice. Protecting a culture from a virus is a critical part of a leader’s role. When a leadership fails to address a virus employee, the rest of the organization knows about it. Getting rid of a virus employee will show your employees that they are worth protecting and strengthen the organization’s AZ CPA culture. Bryan Shelton, M.S. is senior consultant with The Rainmaker Consulting Group— www.TheRainmakerAcademy.com.

NOVEMBER 2011 y AZ CPA

Classifieds Business Opportunities/ Practices for Sale

Employment Opportunities

WANTED – CPA PRACTICE: No broker/commissions. Cash purchase. CPA with 10+ years experience. Very high client retention. Interested in buying practice up to $100K in billings. Email Brandy at ashlee.shoulders@gmail.com. BUYING OR SELLING A PRACTICE? Let me make it happen for you. • Integrity • Confidentiality • 48 years selling Arizona businesses. Call Allan Jeffryes, the Jeffryes Company at (602) 279-4988. WANT TO SELL OR BUY AN ACCOUNTING PRACTICE? Make it easy on yourself. Call Gary Hankins, CPA (800) 584-4595, ext. 05. hankins@ apsleader.com. www.accountingpracticesales.com.

AUDITOR/CPA— Seeking a senior level auditor with at least 3 years of audit experience to join our fun group of CPAs in the cool pines of Prescott, Arizona. Candidate must be able to run an engagement from start to finish with supervision, and be ready to manage staff. Excellent communication and organization skills. Expertise with nonprofit, Yellow Book and Single Audits required. Schutte & Hilgendorf is a small, but growing CPA firm providing audit, tax, and accounting services to a wide range of clients, including individuals, businesses, non-profit organizations, and homeowners associations throughout Northern Arizona. www. prescottaccountants.com CPA, AUDIT MANAGER, part time, assist with compilations and reviews in Phoenix. auditmanager2@yahoo.com.

Governmental Specialists/ CPAs—Heinfeld, Meech & Co., P.C., recognized leaders in governmental and non-profit accounting, auditing and consulting, seeks ambitious and motivated individuals with at least two years experience specializing in governmental accounting and/or auditing for our growing offices in Phoenix, Tucson and Flagstaff. Nationally recognized on the “25 Best Small Companies to Work for in America” list for the past four years, our firm is committed to providing a superior work environment and career opportunities for our staff. Competitive salaries and benefits offered. BS in Accounting and at least 2 years governmental accounting or auditing experience required. CPA or CPA candidate preferred. Travel primarily within the Southwest region required. Email and salary requirements to: recruit@heinfeldmeech.com.

Miscellaneous ENTREPRENEURIAL CPA NETWORK (eCPAn)—Wednesday No-

After 25+ years serving non-profits, closely held businesses and the individuals who run them, Brenda Blunt is pleased to announce the establishment of her own firm

Brenda A. Blunt, CPA, PLLC

Call José Herrera at (602)324-4741 or e-mail: advertise@ascpa.com

Brenda offers a wide variety of tax, accounting and business consulting services including tax planning and compliance, strategic planning, multi-entity structures, and planned giving. Brenda has especially deep experience in the not-for-profit area working with hundreds of local and national not-for-profit organizations, consulting with attorneys and other CPA’s regarding their NFP clients and recently having served on the steering committee for the NFP practice group of a top-10 national accounting firm. As a result, she is recognized for her expertise addressing exempt status, UBIT, public charity status, private foundation, compensation reporting, related entities and other issues unique to not-for-profit entities. Brenda is a member, and the initial chair, of the ASCPA NFP Section Steering Committee and a frequent national and local speaker on topics of interest to not-for-profit organizations.

Brenda A. Blunt, CPA, PLLC One East Camelback Road, Suite 860,Phoenix, AZ 85012 602-692-6856 – BrendaBluntCPA@cox.net

SEPTEMBER 2011 y AZ CPA

Is your firm moving? Did you get a promotion? Do you have a new hire in your firm? Announce it here with discounted ads in the AZ CPA for our members only. We will even create the ad for you at no additional charge. “Thank you and the ASCPA for the beautiful ad. I have already received a number of comments on it and have even been contacted (within days of it hitting the street!) by a potential new client.” —Brenda Blunt, CPA

22 AZ CPA y NOVEMBER 2011

vember 30, 2011 speaker Bruce Newman with CMIT Solutions presents Piercing “The Cloud” Can It Lift Your Business? Why Cloud Computing? Regular luncheon meetings are 11:30-1:30; all meetings located at DoubleTree Suites, 320 N 44th St. Cost $20 for members and $35 for non-members. For more information e-mail us at info@ecpan.org or see website- www.ecpan.org.

WANTED – CPA PRACTICE: No broker/commissions. Cash purchase. CPA with 10+ years experience. Very high client retention. Interested in buying practice up to $100K in billings. Email Brandy at ashlee.shoulders@gmail.com We Buy Clients—Our CPA firm is seeking to buy clients in increments of one to a small practice in the Scottsdale and Phoenix Metropolitan area. Our staff has been practicing in public accounting for over 30 years and specializes in the

Upcoming ASCPA Conferences small- to medium-size business needs. We emphasize on business accounting and taxes. We are located in North Scottsdale. If you are downsizing or retiring and want an easy transition, please call us today. Ask for Kara at (480) 990-2727. ESTATE/GIFT/GST TAX RETURNS AND PLANNING ISSUES POSE A CHALLENGE FOR YOU? Estate planning/compliance is not a science; it’s an art. Let’s make a better plan for your client. Ira Feldman, CPA/CVA/ CEP (602) 850-5101 or ira@felco.biz or www.felco.biz

Office Space CUT $$$$$$—Move into the “ACCOUNTING ANNEX”—Tenant sought. Office space to rent. Suitable for a dynamic CPA or CPA firm. Share phenomenal resources. On light rail and next to a station. Two conference rooms, included. 3,687 ft. to 4,210 ft. Unique property next to the heart of downtown, walk to baseball and basketball stadium. Short-term lease is welcome. Call Lance at (602) 741-7876 cell. PROFESSIONAL CPA OFFICE— 16TH Street & Glendale, 1,500 to 3,000 SqF prime, furnished, office space available. 8 private offices, large cubicle area, conference, utility/workspace, and employee breakroom. Special 1st. yr. $14 ft. E-mail Jason@azcre.biz. OFFICE SHARING CPA with tax and estate/financial planning background seeks office sharing arrangement with CPA / Financial Planning group in north Scottsdale/Phoenix. Email CPA4863@ gmail.com.

Forensic & Litigation Services Conference Dec. 7—Phoenix

Hear about the latest tools and best practices in forensic accounting at the second annual Forensic & Litigation Services Conference. Topics include: • How to become an expert witness and to prepare and present expert witness testimony • The ins and outs of being an expert witness in divorce cases • Assisting the court as a court-appointed receiver or other expert • How cloud computing and other changes in technology have changed computer forensics

Technology Conference Dec. 14—Phoenix

• Which technology tools will give me the best return on investment? • How can Windows 7 help me become more productive? • Should I go with the cloud? • Is Office 365 right for me? • How can OneNote help me organize information and collaborate with others? • How can excel macros save hours of work? Get the answers to these questions at this year’s technology conference, led by K2 Enterprises.

Nominate a CPA for the 2012 Public Service Award Do you know a CPA who does great work for the community? Nominate them for the ASCPA Public Service Award. The recipient will be honored at the ASCPA Annual Meeting & Awards Luncheon in May of 2012, receive a framed Kachina print and be featured in an article in the AZ CPA. Self nominations are also encouraged. Don’t be shy. This is a great opportunity for you to get the word out about the wonderful organizations you support. The deadline is Nov. 18. Download a nomination form at www.secure.ascpa. com/psaap.doc.

NOVEMBER 2011 y AZ CPA

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