August/September 2016 by Receivables Advisor

ISSUE SPONSORED BY

TIPS ON SERVING AS MONITOR FOR AGING CLIENTS CONTRIBUTE AN EXTRA $1,000 TO YOUR IRA AND $6,000 TO YOUR 401(K) IF 50+

CONSULTING ON SMALL BUSINESS ACCOUNTING

IRS EXAMINATIONS OF BUSINESSES

TOP 5 TAX ISSUES FOR RETIREMENT NEW AUTOMATIC ACCOUNTING CHANGE METHOD

ASSURING YOUR AUTHORITY WITH TAX RESEARCH SOFTWARE

DISPUTING FBAR PENALTIES

UPDATING 1040 TAX SOFTWARE

WHAT IS FOG COMPUTING?

BUSINESS TAX CHART NEW REGULATIONS ON OVERTIME RULES

Rick Richardson, CPA

August/September 2016

Vol. 16, No. 2

PREMIER CPA TECHNOLOGIST AND UNOFFICIAL BEACH BOY CPA Magazine P.O. Box 92342 Southlake, TX 76092

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6 Sidney Kess

1040 TAX AND SMALL BUSINESS ACCOUNTING

CPA, J.D., LL.M

Jerry Love CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA

Robert E. McKenzie J.D.

13 Julie Welch CPA, CFP

T. Steel Rose CPA, Editor

16 Martin M. Shenkman CPA, MBA, PFS, J.D.

Rick Richardson CPA, CITP, CGMA

NEXT ISSUE: PAYROLL, TIME & BILLING AND WRITE UP Product Reviews Time & Billing Payroll Processing Write Up Manage and Expand Your Practice Business Valuation Marketing Your Firm SOC SSAE 16 & Security Audits Secrets of Write Up A Map for Success in IRS Representation Proactive Tax Planning

e m o c l e W P

assion is a good thing to have. This is especially true for a CPA. It is what keeps a CPA at the office late during tax season. It is what keeps a CPA searching for ways to improve his or her client’s tax situation. This passion often manifests in a CPA’s early life whether it was already in the tax field or in a recording studio. Such is the case with Rick Richardson who developed a prestigious enough musical reputation to record with The Beach Boys on key songs. We talk with Richardson about working with the legendary musicians and how it led him to the world of accounting. Tax Advisor Sidney Kess describes key tax rules covering five different aspects of retirement. Financial Advisor Jerry Love discusses the overtime rules finally released by the Department of Labor and what they mean for your clients. This issue features two columns from Tax Client Advisor Julie Welch about IRAs and how to use them to save your clients money. Tax Planning Advisor addresses what services you should be offering your aging clients. Technology Advisor Rick Richardson reveals a possible future for CPAs involving fog computing and what its implications could be for users. IRS Defense Advisor Robert McKenzie displays tax compliance rates for different companies and the process that occurs if one of your client’s businesses is audited. CPE credit may be obtained utilizing the quiz on page 29 of this magazine over the content in this issue. Please read the instructions to make sure the credit satisfies your governing body’s requirements. Additional CPE quizzes over different content can be found at www.CPAMagazine.com.

T. Steel Rose CPA, ACS Editor

editor@cpamagazine.com

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1040 August/September 2016

ADVISORS

FEATURES

Volume 16, No. 2

Consulting On Small Business Accounting

TAX ADVISOR

JOSHUA FLUEGEL

Phishing Threats for Accounting Firms and Clients

Premier CPA Technologist and Unofficial Beach Boy

IRS DEFENSE ADVISOR

Assuring Your Authority with Tax Research Software

New Administrative Authority Issued Affecting Automatic Accounting M ethod Change Filers

Updating Your 1040 Tax Software

Top 5 Tax Issues for Retirement Sidney Kess, CPA, J.D., LL.M 8

FINANCIAL ADVISOR

Department of Labor Releases New Regulations on Overtime Rules Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA

IRS Examinations of Businesses Robert E. McKenzie, J.D.

TAX CLIENT ADVISOR

Contribute An Extra $1,000 to Your IRA and an Extra $6,000 to Your 401(k) if 50+ Julie Welch, CPA, CFP

PRACTICE ADVISOR

Tax Resolution Services Prove Valuable T. Steel Rose, CPA

TAX PLANNING ADVISOR

f CPE

TECHNOLOGY ADVISOR What is Fog Computing?

Rick Richardson, CPA, CITP, CGMA 4 I A U G U S T/ S E P T E M B E R 2 016

www.CPAmagazine.com

27 29

Practice Management Tips on Serving as Monitor for Aging Clients Martin M. Shenkman, CPA, MBA, PFS, J.D. 18

so 3 Hour

TODD SEXTON, MBA

JOSHUA FLUEGEL

PETER J. SCALISE

Comparison chart

IRS Penalties and Disputing Penalties Related to Foreign Assets Including Foreign Bank Account (FBAR) Penalties ADAM FAYNE

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Top 5 Tax Issues for Retirement

Retirement is life changing in so many ways, and it is different for different people. For some it means downsizing and relocating. For others it means reduced work schedules, ceasing work entirely, changing careers or starting businesses. As people age, for many there is an increased need for medical care and other assistance. Each of these areas entails tax rules. Here are some of the key tax rules for retirees.

1. Social Security Benefits Social Security benefits can begin

for an eligible worker at age 62. The current full retirement age, which is the age at which benefits are not reduced, is 66. The full retirement age will rise to 67 for those born in 1960 and later. If benefits are delayed past full retirement age, additional credits can be earned to age 70. Spouses, divorced spouses, and widow(er)s may be eligible to collect on a worker’s benefits at an earlier age. Regardless of the age at which benefits commence, the same tax rules apply. For federal income tax purposes, Social Security benefits may be tax free or includible in gross income at 50% or 85% (Code Sec. 86). High-income taxpayers can assume that they are subject to the 85% inclusion amount; others may have to do calculations to determine whether benefits are tax-free or their applicable percentage. If “income” (defined below) is no more than a base amount, benefits are tax-free. “Income” for this purpose is income that is taxed, such as wages, interest, ordinary dividends, capital gain distributions, and pensions, tax-exempt interest, and one-half of Social Security benefits. The base amount is $25,000 if single, head of household, qualifying widow(er), or married person filing separately who lived apart from his/her spouse for the entire year; $32,000 if married filing jointly, and zero if married filing separately but lived with the spouse for any part of the year. If “income” is more than the base amount but not more than $34,000 if single, head of household, qualifying widow(er), or married person filing separately who lived apart from his/her spouse for the entire year ($44,000 for joint filers), then 50% of benefits are includible in gross income. If “income” is more than $34,000 ($44,000), then 85% of benefits are includible in gross income. For state income tax purposes, the rules may be different. Twenty-eight states and the District of Columbia fully exempt Social Security benefits from their income taxes. A handful of other states have different income thresholds for taxing benefits than the income thresholds for federal income tax purposes.

2. Health Care Health care costs are a significant outlay in retirement. According to one report (https://www.hvsfinancial. com/PublicFiles/Data_Release.pdf), a healthy 65-year old couple retiring this year can expect to pay nearly $400,000 over the 6 I A U G U S T/ S E P T E M B E R 2 016

www.CPAmagazine.com

A healthy 65-year old couple "retiring this year can expect to pay nearly $400,000 over the remainder of their lives for Medicare Parts B and D.

Tax Advisor

Sidney Kess, CPA, J.D., LL.M remainder of their lives for Medicare Parts B and D, a supplemental insurance policy, dental and vision care, and out-of-pocket expenses. Those with chronic health issues will pay much more. Medicare premiums and other unreimbursed medical expenses are a deductible medical expense (Code Sec. 213). In 2016, those age 65 and older by year-end can deduct itemized medical expenses to the extent they exceed 7.5% of adjusted gross income (AGI). Starting in 2017 and later, the AGI threshold rises to 10% (the same as the threshold for younger taxpayers). If a taxpayer is a “self-employed individual” (which for purposes of the self-employed health insurance deduction includes sole proprietors, partners, limited liability company members, and more-than-2% S corporation shareholders), Medicare premiums are deductible in full as an adjustment to gross income (Chief Council Advice Memorandum 201228037). High-income taxpayers pay an additional Medicare premium (a surcharge), the amount of which varies with modified adjusted gross income (MAGI) two years prior to the current year. Thus, Medicare premiums for 2017 will be determined by MAGI on 2015 returns that have just been filed. For 2016, the surcharge applies for singles and married persons filing separately with MAGI over $85,000 ($170,000 for joint filers) (https:// www.medicare.gov/your-medicare-costs/part-b-costs/part-bcosts.html). Health Savings Accounts. Once an individual reaches age 65 and can begin Medicare, contributions to a Health Savings Account (HSA) are no longer permissible (Code Sec. 223(b) (7)). However, those who have existing accounts can tap into them at any time. Withdrawals to cover qualified medical costs are tax free; withdrawals for any other purpose are taxable. Beginning at the age 65 when Medicare begins, the 20% penalty on nonqualified withdrawals no longer applies (Code Sec. 223(f) (4)(C)). Thus, funds can be used for a nonmedical purpose on a penalty-free basis. Continued on page 22

WHEN THE Obtain Form 2848 Power of Attorney

IRS CALLSâ&#x20AC;¦

Determine Audit Scope

Deficiency? Yes Discuss with Group Mgr.

Settle?

No Submit Freedom of Information Request for IRS Workpapers Arrange Appeals Conference

Settle? No File Tax Court Petition Pre-Trial Conference

Settle? No Tax Court Trial

CONTACT CPA TAX DEFENDER If the IRS contacts a client about an audit, contact CPA Tax Defender, a network of experienced CPAs and Attorneys who handle the IRS audit for you or advise you on the next step. A systematic approach provides reports for you to provide your client to determine the next step...all the way to Tax Court.

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TA X R E P R E S E N TAT I O N SERVICES

Department of Labor Releases New Regulations on Overtime Rules

It has taken the Department of Labor (DOL) almost two years to release the final regulations requested by President Obama. The DOL press release announcing the final regulations indicates: “This long-awaited update will result in a meaningful boost to many workers’ wallets, and will go a long way toward realizing President Obama’s commitment to ensuring every worker is compensated fairly for their hard work.” At a press conference on March 13, 2014, President Obama issued a Presidential Memorandum directing the DOL to modernize and update the regulations which define the white collar exemption from overtime pay. At that time, he expressed his concern. “The salary level test is supposed to help identify salaried workers who are entitled to overtime pay when they work long hours. The current salary level is outdated and no longer does its job of helping to separate salaried white collar employees who should get overtime pay for working extra hours from those who should be exempt.” A case can be made for the wage amount used to determine exemption from OT is out of date and inflation has caused it to be irrelevant. A blog post by the DOL states: “For decades, the salary threshold under which all whitecollar, salaried workers qualify for overtime has failed to keep up with the rising cost of living. In 1975, 62% of full-time salaried workers were eligible for overtime protection based on their pay. Today, only 7% are eligible under the outdated salary level. The current salary level is so low that it does not effectively identify which white-collar workers are entitled to overtime protection. That is an economy out of balance. “So we’re fixing it. We have more than doubled the salary threshold − lifting it from $23,660 to $47,476 per year. That means some 35% of full-time salaried workers, based on their pay, will now be eligible for overtime.” https://blog.dol.gov/2016/05/19/middle-class-work-deserves-middle-class-wages/ In another blog post by the DOL, they project who they believe will be the primary beneficiaries of the new regulations: “The updates will impact 4.2 million workers who will either gain new overtime protections or get a raise to the new salary threshold. So who are these workers? “More than half − 56% − are women, which translates into 2.4 million women either gaining overtime protections or getting a raise to the new threshold as a result of the rule. We also find that more than half – 53% − of affected workers have at least a four-year college degree, and more than 3 in 5 (61%) are 8 I A U G U S T/ S E P T E M B E R 2 016

www.CPAmagazine.com

the annual salary level “ofSets$47,476 for Executive,

Administrative and Professional workers to establish they will be exempt from the overtime (OT) compensation

Financial Advisor

“

Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA age 35 or older. And 1.5 million are parents of children under 18, which translates into 2.5 million children seeing at least one parent gain overtime protections or get a raise to the new threshold.” https://blog.dol.gov/2016/05/18/who-benefits-from-thenew-overtime-rule/ The final regulations were released by DOL on May 18, 2016 and published in the Federal Registry shortly thereafter. It is expected initially to extend overtime pay to over 4.2 million workers. Further, DOL indicates the regulations change “strengthen existing overtime protections for 5.7 million additional white collar salaried workers and 3.2 million salaried blue collar workers whose entitlement to overtime pay will no longer rely on the application of the duties test.” The effective date for implementation is December 1, 2016. The essential elements of the new regulations are: 1. Sets the annual salary level of $47,476 for Executive, Administrative and Professional workers to establish they will be exempt from the overtime (OT) compensation; 2. Sets the annual salary level of $134,004 for highly compensated employees (HCE) to establish they will be exempt from the overtime (OT) compensation; 3. For the first time ever, establishes a mechanism to automatically revise these compensation levels every three years beginning January 1, 2020 in order to maintain and ensure the salary levels continue to increase as the average compensation increases (DOL indicates it will publish all updated salary amounts in the Federal Register at least 150 days before their effective date, and will post them on the Wage and Hour Division’s website); and 4. Another new element is the regulations allow employers to use nondiscretionary bonuses and incentive payments (including Continued on page 23

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PAYROLL PROCESSING

WRITE UP

IRS Examinations of Businesses

Although the vast majority of Americans file accurate returns and promptly pay their taxes, unfortunately a significant minority of U. S. taxpayers fail to accurately report their income and promptly pay their taxes. IRS studies show that approximately 83% of taxpayers are fully compliant while 17% fail to accurately report their income, file their tax returns or fail to timely pay their taxes. By contrast, only about 50% of Greek taxpayers are compliant and that may explain why that country needed a European Union bailout. Below is a breakdown of compliance rates in other advanced economies according to Reuters: United Kingdom 77.97% Belgium 70.15% Switzerland 77.70% Portugal 68.09% France 75.38% Germany 67.72% Austria 74.80% Italy 62.49% Netherlands 72.84% Many individual taxpayers have little opportunity to under report their income since they receive Form W-2s from their employers and Form 1099s from their banks and brokers. Selfemployed individuals and businesses have many more opportunities to fail to meet their tax obligations and unfortunately many of them do game the system. Because of massive, improvident budget cuts by Congress, the IRS has less opportunity to find noncompliant businesses. Sine 2010, Congress has gutted the IRS budget and as a result it now only audits .8% of tax returns which is a substantial drop from 2010 when it audited 1.1% of returns. Those businesses among the unlucky few who are audited can expect an intense review of their returns by an IRS revenue agent. Over the years the IRS has developed a variety of techniques to discover underreported business income. Since many noncompliant businesses seek to hide their omissions the IRS will not only review receipts but use indirect methods to discover them.

Indirect Methods When the taxpayers’ records are not available or are inadequate the examiner may consider the use of the following indirect methods: • Bank deposit analysis • Fully developed cash T method • Source and application of funds • Net worth method • Percentage of markup method • Unit and volume method

The following is a discussion of the indirect methods. If any of these methods rely on estimates, they must be corroborated by other methods to establish a stronger position. Bank Deposits Method Each field audit will start with the agent using a bank deposits method. He or she will trace cash through a bank deposit analysis or use the source and application 10 I TA X S E A S O N 2 016

www.CPAmagazine.com

Each field audit will start with the agent using a bank deposits method

IRS Defense Advisor Robert E. McKenzie, J.D.

of funds method. Several unique facets of this analysis operations should be recognized. • Cash payouts are not deposited, but the money used to make the cash purchases originated from sales. This is cash that would not be deposited into a bank account and must be added back to the bank deposit analysis. • In a restaurant business, cash payment of employee credit card tips is money that is not deposited, but originated from sales. Again, this cash must be added back to the bank deposit analysis. • Sales tax collected from customers for cash sales is money deposited that is not a source of income. In many states the sales tax for restaurants and bars is higher than the sales tax for other retail businesses. • Cash collected from vending machines is cash that needs to be deposited and included in gross receipts. If significant coin and currency deposits are not found on the deposit slips the examiner may need to determine the amount of income from this source and add it to the bank deposit analysis. • Credit card payments from credit card companies for sales will include deposits of employee tips plus the sales taxes plus the sale. Only the portion representing the sale is taxable. • Loans from shareholders are a non-taxable source of cash. Proof of payment is necessary to establish facts. • Transfers between bank accounts are non-taxable. The bank deposit analysis method assumes the business owner deposits all income in a bank account. In a cash-intensive business such as a bar or restaurant, this may not be the case. For that reason, the bank deposits analysis should generally be supplemented with another indirect method when auditing a bar or restaurant. Use of Another Method to Support an Indirect Method Another examination technique may be used such as having the examiner inspect the supply invoices to find the name of the company that prints the guest checks. This printing company Continued on page 24

Consulting On Small Business Accounting

BY JOSHUA FLUEGEL

common problem for clients is their business getting in the way of running the business. A CPA can not only provide clients money-saving tax tactics but review clients’ financials to make sure they will be able to pay employees. This is where small business accounting software helps a CPA provide business owners an invaluable service. “Accounting itself is a challenge for small businesses,” Mike McDerment, CEO and cofounder of FreshBooks. “Owners would rather be focusing on their business than going through Mike McDerment receipts, reports and a mountain of paperwork. It can be intimidating and even isolating for those that are not knowledgeable in the complexities of accounting.” Compliance and managing the inflow and outflow of money require more hours from an accounting firm owner than there are in a day. However, software can help in both respects. “One of the biggest challenges small businesses face is the impact of regulatory and compliance issues,” said Chuck Gossett, CEO of Cougar Mountain Software. “To avoid fines and penalChuck Gossett ties, businesses must always remit accurate and timely filings. For many small businesses, keeping tax tables up to date and calculating tax amounts correctly is a tedious task. To help solve this problem, comprehensive accounting software solutions…make use of subscription services that keep the tax rates and calculations up to date. Updates are quickly available and can be applied automatically, saving both time and the risk of data entry error.” “Small business owners often wear

many hats: founder, HR manager, social marketing strategist, bookkeeper, you name it,” said Karen Peacock, senior vice president and small business segment leader Karen Peacock at Intuit. But unfortunately, with so much on a small business owner’s plate, they often don’t have the time, energy or training to manage their books and deeply understand their finances. “Using an online robust business management tool allows small businesses to easily track their finances, integrate apps to help them automate redundant tasks and access their data anytime, anywhere. Making time to run a business is one thing but managing all the associated data is not only a requirement for tax purposes but is extremely useful when used in realtime. “Reliable and consistent accounting data, in a protected system environment seems basic, but it is still seen as one of the biggest challenges when it comes to small Luis Murguia businesses,” said Luis Murguia, global head of SAP Business One at SAP Accounting. “In today’s digital economy era, what enables small businesses to drive their margin and revenue is the ability to connect data from their inventory, sales and purchase orders, and customers. The comprehensive analysis of accounting data can help to identify errors and even possible frauds.” “Small business owners cited the economy (28%) and raising capital (15%) as top hurdles,” said Russ Fujioka, U.S. president of Xero. “The cloud, which allows small business owners the ability to access business data anytime and anywhere, is the single most important

element that can help small business owners move the needle. A genius in tax code and law may enjoy managing their own firm’s accounting, then take responsibility for the firm’s clients and appropriate some of the burden using the tools Russ Fujioka, available. “The biggest challenge for small businesses remains the same as it has always been: proper accounting has great benefits (compliance, business insights), but Kirk Simpson, it’s not a natural part of the small business owner’s skill set,” Kirk Simpson, CEO and co-founder of Wave. “Accounting software that assumes any degree of expertise in accounting, will be a bad match for the owners of small and micro-businesses. This does not mean that accounting software should be ‘dumbed down’ — real double-entry software is as important as ever. But the software workflows must be made to match the business owner’s processes and abilities.” “Small businesses are often under-resourced and lack accounting expertise,” Raj Sabhlok, president of Zoho Corporation. “Accounting software and features that can mask Raj Sabhlok the technical accounting nuances are most important for small businesses. Owners don’t have to be an expert in order to financially manage their business, nor to generate accountant ready financial statements. More importantly, business owners are able to see the financial health of their business at a click of a button.”

Manage, Enhance and Expand Your Practice A U G U S T/ S E P T E M B E R 2 016 I 11

√

Tax Tips: Contribute An Extra $1,000 To Your IRA And An Extra $6,000 To Your 401(k) if 50+

By Julie Welch, CPA, PFS, CFP

If your client is age 50 or older, he or she may be able to contribute extra amounts to their retirement plan. While these are called “catch-up” contributions, a taxpayer is eligible even if he or she have always contributed the maximum amount. The extra amount that can be contributed depends on the type of retirement plan. Here is the regular amount, the extra amount, and the total amount a taxpayer can contribute to their retirement plan if they are age 50 or older: SEE CHART AT RIGHT A taxpayer must have at least as much earnings from their job or business as they contribute to their retirement plan. Also, the extra contribution can be made as long as the taxpayer will be age 50 or older sometime during that year.

Year

Regular

Extra

Total

2016 Individual Retirement Accounts (Traditional and Roth IRAs) 2016

$5,500

$1,000

$6,500

$18,000

$6,000

$24,000

$12,500

$3,000

$15,500

401(k) 2016 SIMPLE 2016

v EXAMPLE

You are 55, earn $35,000 from your job, and are single. If your employer has a 401(k) plan, you can contribute up to $24,000 for 2016. Additionally, you can contribute up to $6,500 to your IRA, which could be either a traditional IRA or a Roth IRA.

CPE

Related CPE Quiz on Page 29

Julie Welch (Runtz) is the Owner of Meara Welch Browne, P.C. She graduated from William Jewell College with a BS in Accounting and obtained a Masters in Taxation from the University of Missouri-Kansas City. She serves as a discussion leader for the AICPA National Tax Education Program. She is co-author of 101 Tax Saving Ideas. Manage, Enhance and Expand Your Practice A U G U S T/ S E P T E M B E R 2 016 I 13

Tax Resolution Services Prove Valuable

Tax Resolution is a fascinating way to expand your firm as long as you don’t overpromise expected results. CPAs, attorneys and EAs are in a unique position. Only these credentialed professionals are able to represent taxpayers before the IRS without the client being present. There is a greater need because of the proliferation of correspondence audits and horror stories of dealing with an understaffed IRS. There are many good reasons for clients to never talk with the IRS. Clients can rarely improve the situation. Now technology is making it easier by creating templates for forms, letters and transcripts. Attorney Kurt Avarell, founder of Canopy Tax said one in 10 Americans have some problem with the IRS. “One of the most dangerous positions for a CPA is when they do something they don’t do very often,” Avarell said, “Some CPAs specialize in tax resolution work. It is unusual for a tax practice to not do resolution work.” To get started you need your client to sign a form 2848 power of attorney or a form 8821 for information only. The system he created helps walk the accountant walk through how to deal with the IRS with all the forms and letters they need to solve the problem. According to Avarell, the Canopy Tax system logs into eServices and pulls down tax transcripts. “You can see if someone filed their estimates,” Avarell said. “Canopy also parses out codes to provide a 10 page transcript in readable form.” Avarell came up with the idea in New York doing pro bono work on the side handling tax resolution cases. Avarell got a lot of satisfaction helping average Americans who made a mistake. “They were not going rogue,” Avarell stated, “it’s because the tax code is complex and incomprehensible. Most people who owe money are not tax protestors. There were several who did not have enough money because of a medical emergency. They may have pulled money out of an IRA that had withholding but the tax withheld was not enough.” After his pro bono experience, Avarell taught himself how to program and built the original Canopy Tax system in his basement. “The IRS is sending more notices,” Avarell said. “Mail audits are up considerably. The IRS has cut back on auditing and the way they do auditing. They have cut back in the collection division.” CPAs will often wait on the phone for hours to talk with the IRS Collections Unit. “At a conference,” Avarell said, “I heard a person who will wait on hold with the IRS and then sell their spot in line.” 14 I A U G U S T/ S E P T E M B E R 2 016 www.CPAmagazine.com

There is a first-time penalty “abatement which sometimes removes all of the penalties. It is rare to see interest removed. It is a much higher standard.

“

Practice Advisor T. Steel Rose, CPA

Tax Resolution is offered by highly reputable attorneys, CPAs and a few not so reputable. The Offer in Compromise (OIC) program enables taxpayers to resolve debts by entering into an agreement with the IRS for reduced payments. A few high profile cases have involved Tax Resolution businesses which overpromised OIC results. However, the majority of people do not qualify and that fact was not made evident in the advertising for these services. An Offer in Compromise is not the primary way to get satisfaction. “There is always some relief,” said Avarell. “The best case is you get out for much less than you owe; the more common result is to get someone on a payment plan. The client calls the CPA because they have levied their wages. It is rare for the IRS to take a house or a car. They don’t do that, but the fear is out there. So just to get them on a payment plan is a relief,” continued Avarell. “There is a first-time penalty abatement which sometimes removes all of the penalties. It is rare to see interest removed. It is a much higher standard. It is a smart avenue to try. There are 50-100 penalties; they are expensive. The most common are failure to file on time, failure to pay and the accuracy related penalties like taking too much of a mortgage deduction,” Avarell elaborated. Faron Adamson, CPA has two tax practice offices in Missouri and likes Canopy’s workflow system and customizability. “It helps workflow scheduling because clients can log in and interface securely,” Adamson said. “It is satisfying to see it solve CPA’s pain points,” Avarell concluded.

Publishing CPA Magazine since 2002, T. Steel Rose began his career with Price Waterhouse leading to the start of Rose & Cash, CPAs. He was a VP for Solomon Software, now owned by Microsoft, and launched CPA Software News in 1991.

Practice Management Tips on Serving as Monitor for Aging Clients

CPA practices, large and small, should retool to capitalize on new services the aging population will demand. The nature of services must change because CPAs, as the trusted adviser, will have a far more important role in protecting aging clients. While peak financial decision-making ability occurs at age 50, from age 60 onward there is a gradual decline in financial decision-making quality. By the time a client reaches his or her 80s and 90s there has likely been significant impact. Of even greater concern is that while a client’s abilities decline, the client’s confidence in his or her decision-making ability remains the same.1 The services and practice management changes might firms consider include:

Can or should aging partners, “instead of being subjected to

mandatory retirement policies, be provided leeway to generate these services from the aging clients they have served for decades?

” Tax Planning Advisor Martin M. Shenkman CPA, MBA, PFS, J.D.

√ Monitoring Services Generally

• Few firms focus much attention on providing and marketing financial monitoring services to clients, but all should. • Elder financial abuse is a burgeoning threat to aging or infirm clients. Practitioners can identify clients that are aging or have health challenges. Often practitioners will simply know of these issues, and if not medical expense, age and other data in a Form 1040 might provide ample clues. But the reality of the data suggested in the introduction is that many clients will face these issues. Thus, the better approach is to offer services to all clients as they age so the odds of anyone becoming the next elder abuse statistic will be curtailed. • Practitioners are already well skilled in reviewing accounts and identifying potential issues. These skills simply need to be packaged as a service to offer aging clients before financial disasters occur:

√ Firm Practice Decisions

• Determine how monitoring services will be provided, by whom and at what billing rates. • Which departments will address these services? Some firms have high net worth family office departments which provide bill paying and similar services as really a luxury purchase. These services can be incredibly helpful to a wide array of new clients and can also open up new practice development opportunities. • Can or should aging partners, instead of being subjected to mandatory retirement policies, be provided leeway to generate these services from the aging clients they have served for decades? Often long time family CPAs are the person of choice for many clients to serve as a trust protector or in other capacities. In those capacities it may be feasible to have the firm assist in providing the monitoring or other services useful to carrying out those duties. 16 I A U G U S T/ S E P T E M B E R 2 016

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• Should the firm hire a care manager to provide dollarization of care plan costs for aging clients or subcontract this work out to third parties? This input might be essential to financial planning for aging clients. Also, care managers can provide a valuable add on service to aging clients that might create benefits to the clients by integrating into the monitoring services.

√ Engagement

• Prepare new form engagement letters that clearly delineate what services will be provided, that there is no guarantee of detecting fraud, elder financial abuse or other anomalies, obtaining authority to discuss financial matters with a list of approved persons and authorization to consult with and disclose information to other key advisers (e.g., estate planning attorney, trust officer, etc.). As the array of monitoring services increases the options to be included in form engagement letters should grow. • Determine who should retain you to provide the services. In some instances it may not be the client but the agent under the client’s durable power of attorney, a successor trustee under the client’s revocable trust, etc. There may even have to be multiple fiduciaries and the client each retaining the practitioner.

√ Automation and Bill Paying

• Review how the client’s financial accounts might be consolidated or simplified to make monitoring easier. • Arrange for automatic receipt of electronic statements from financial institutions on a monthly basis. Be certain that this is authorized in the engagement letter and obtain whatever documentation each financial firm will require. • Discuss with the client the advantages of electronic bill Continued on page 26

Assuring Your Authority with Tax Research Software BY JOSHUA FLUEGEL

lients assume you know every money-saving tax tactic in the book. By the end of tax season it certainly looks that way as well. What the client does not see is the years of combing through books, court cases and continuing education. This research is what makes you the authority for your clients and assures your value in the accounting profession. As this knowledge is the epicenter from which you stake your claim as a tax professional, the essential resource in the arsenal is tax research software. As most tax professionals have access to some sort of tax research resource, it is important every included feature is being used to maximum benefit. The tax code itself is enough to get lost in and waste countless hours. It is important to get in and out of the required research as quickly as possible. It is also important to make sure the information retrieved is perfectly applicable thus rendering a desirable return on investment for the time spent. “With all they have to do, CPAs can become more efficient by harnessing the power of technology,” said Lisa Fitzpatrick, vice president and general managLisa Fitzpatrick er for tax and accounting at Bloomberg BNA. “Leveraging a comprehensive research platform with searchable source materials, news, and practice tools allows them to more quickly access a richer set of data to inform their analysis and planning, and ultimately provide better service to their clients.” A question often asked and answered far fewer times is whether the task is done or not. So is true with tax research. With an opposing force as powerful as the IRS,

the appropriate measures must be taken without over committing resources to a particular subject. A tax professional must know the functionality of his or her tax research software to be certain of information derived. “We often hear that tax professionals are unsure while they are researching whether they have found all they need on a topic or whether they have ‘finished’ their Jill Weinstein research and have all of the option considered for their clients,” said Jill Weinstein, product line manager at Wolters Kluwer Tax & Accounting. “Tax professionals need to be comfortable using their research tools, and feel confident that they are getting the answers they need from the sources they trust. Using practice tools – like charts, checklists, decision trees – is a great way to help make sure you have all of your bases covered.” Data is simply data until a solution can be extracted from it. This is why it’s important that tax research software provide means to not only extract information but discern its meaning to communicate to clients it as well. “…we know that getting to your answer quickly is not the end of your tax research journey, said Brian Peccarelli, president of Thomson Reuters. “Tax practitioBrian Peccarelli ners expect to apply their answers to the issue at hand by taking advantage of practice aids and tools embedded directly in context of the research workflow – whether it’s a checklist to ensure all the implementation steps are covered, a calculator to quantify the impact,

a form or statement to prepare on behalf of a client, or a sample letter that explains conclusions in plain language. When practice aids are thoughtfully integrated as part of the research workflow, it’s like having a roadmap to go from answer to action in one continuous process. This supports the tax practitioner in bringing demonstrable value to their clients.” The tax code is subject to regulations, revenue rulings and court interpretation. It is constantly shifting, augmenting and altering its meaning depending on distinct case circumstances. Tracking interpretation in tax is key. “Every serious tax practitioner needs to stay atop the latest developments in taxation,” said Sean Fitzpatrick, managing director, North American research soluSean Fitzpatrick tions at LexisNexis. By leveraging the tax research tools available a tax professional can help clients before tax season and after tax season for continued financial guidance.

TAX RESEARCH PRODUCTS Checkpoint Thomson Reuters Lexis Advance Tax LexisNexis CCH IntelliConnect/ CHH CodeConnect Wolters Kluwer Tax and Accounting Center Bloomberg BNA

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What is Fog Computing?

By now, you’ve probably heard of cloud computing. That’s where companies rent shared software, computers, and storage instead of buying and installing it all themselves in private data centers. They pay for their usage via subscriptions, accessing those resources over the internet. Cloud computing is all the rage right now, on track to be a $10 billion business for Amazon in 2016; Microsoft hopes it will become a $20 billion business by 2018, and Google thinks it will become bigger than its internet ad business by 2020. So what comes after the cloud? If you ask Cisco, it’s something called “fog computing.” Last month, Cisco was joined by other industry leaders including Intel, Microsoft, ARM, Dell, and Microsoft to back a new “fog computing” consortium, the OpenFog initiative. It sounds like something straight from a Saturday Night Live parody skit, but it’s not. The consortium is holding a conference at Princeton University, to lead the research into fog computing.

Why Cisco Wants This

So what exactly is it? To understand fog computing, you first have to understand cloud computing. In cloud computing, everyone shares the same massive data centers. You run an app on your phone in your hometown, but the backend computers may be in Virginia, or California, or even Ireland. Fog computing has computers and storage scattered all over, perhaps placed closer to the app’s users. The network is smart enough to know where the data is stored. As the network is the star, you can see why Cisco is championing this idea. It means selling a lot more high-end, very profitable network equipment to connect a lot more computers and data centers. Cisco has been largely left out of the cloud computing revolution. As Intel’s customers move to the cloud, they need to buy less networking equipment. Meanwhile, some of the biggest cloud operators, like Facebook and Microsoft, have invented their own, new low-cost network equipment. As for the rest of the traditional IT players (Intel, Dell, ARM and others), if “fog computing” takes off they stand to gain, too. Lots of computers scattered everywhere means selling lots of computer servers and operating systems and chips.

Will It Take Hold?

Just because it’s in Cisco’s self-interest to promote fog computing, doesn’t mean it won’t be a real thing someday. The name “fog” is new, but the general concept isn’t. It used to be called “distributed computing.” Years ago Sun Microsystems even had a slogan “the network is the computer.” (Oracle bought Sun in 2010.) When you talk to anyone in the cloud computing industry today, they’ll tell you that cloud is young and here to stay (and it is). Some believe it will stretch out in a linear line, growing endlessly bigger and more glorious over time. But that’s not how the 18 I A U G U S T/ S E P T E M B E R 2 016

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could become very “This important as billions

of devices join the Internet as part of the “Internet of Things.

“

Technology TBD Advisor Advisor Rick Richardson, CPA, CITP, CGMA computer industry typically works. It’s more like a spiral. The computing industry breathes in and out between centralized and distributed computing models: centralized (mainframes) turned into distributed (PCs and local computer servers, known as “client/server”), and have now become centralized again (cloud computing). So, next up would be distributed. It does this because each model solves the problem created by the last model. Centralized computing allows you to maintain control and efficiently share computers, which lowers cost. But it can create bottlenecks as all apps rush to share the same computers. In addition, it’s expensive to keep building more and bigger data centers. Decentralized allows you to run apps closer to the people using the apps so the apps perform better. This could become very important as billions of devices join the Internet as part of the “Internet of Things.” It can also be cheaper to shove a few computer servers in a room instead of building a big data center. But distributed computing can also create sprawl, get messy, and ultimately cost more. Then again, there’s a rise of new technologies, like quantum computing, that could change everything and squash any tech based on the old ways of doing things, including fog computing.

A Horrible Name

Whether fog thrives or dies, it’s important to note the karmic implications in the name. “Fog” might be a cute play on “cloud”, but it also means unclear and fuzzy.

This article is continued on www.CPAmagazine.com. Rick Richardson, CPA, CITP, CGMA received two AICPA lifetime achievement awards for his contributions to the profession in the field of technology. Providing his annual forecast of future technology trends, Richardson is the keynote speaker at the New Jersey, California and Illinois conferences each year presented by Flagg Management. www.flaggmgmt. com. If you have 20 minutes each week and want to keep current with today’s technology, subscribe to Rick’s newsletter, TechnologyThisWeek.net.

New Administrative Authority Issued Affecting Automatic Accounting Method Change Filers

BY PETER J. SCALISE

n May 5th, the Internal Revenue Service (hereinafter the “Service”) issued Rev. Proc. 2016-29, which outlines automatic accounting method Peter J. Scalise changes and provides administrative procedures for electing them. Consequently, filers of Form 3115 entitled “Application for Change in Accounting Method” filed on or after May 5, 2016 must now follow this updated form of administrative authority. As it should be duly recalled, a revenue procedure is a statement of procedure that affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code (hereinafter the “Code”). Similar to Revenue Rulings, Revenue Procedures are less authoritative than Temporary and Final Treasury Regulations. Regardless, Revenue Procedures are binding on the Service and taxpayers alike and should be adhered to for purposes of assessing tax return filing positions under the Code and Circular 230.

Scope & Application of Rev. Proc. 2016-29 As a synopsis, Rev. Proc. 2016-29 modifies, amplifies, and in part supersedes Rev. Proc. 2015-14 as well as other revenue procedures covering accounting method changes. This revenue procedure makes clean-ups, such as removing now superseded accounting method changes or eliminating reference to the now expired Proposed and Temporary Tangible Property Regulations. Moreover, Rev. Proc.

2016-29 provides new guidance for accounting method changes under the Final Tangible Property Regulations including, but not limited to: • Section 6.01, relating to impermissible to permissible methods of depreciation or amortization, makes clear that depreciation changes are not automatic for property where the taxpayer has previously taken a federal income tax credit;

“Depreciation changes are not automatic for property where the taxpayer has previously taken a federal income tax credit.” • Section 6.20, relating to the revocation of a partial disposition election under the remodel-refresh safe harbor described in Rev. Proc. 2015-56, is modified to provide that such revocation must be made, and the eligibility rules in sections 5.01(1)(d) and (f) of Rev. Proc. 2015-13 do not apply, for any taxable year beginning after December 31, 2013, and ending before December 31, 2016; • Section 11.08, relating to changes for tangible property, provides that the section does not apply to amounts paid or incurred for repair and maintenance costs that the taxpayer is changing from

capitalizing to deducting and for which the taxpayer has claimed a federal income tax credit or elected to apply I.R.C. § 168(k)(4); and • Section 11.10, relating to the remodelrefresh safe harbor described in Rev. Proc. 2015-56, is modified to provide that the eligibility rules in sections 5.01(1)(d) and (f) of Rev. Proc. 201513 do not apply for any taxable year beginning after December 31, 2013, and ending before December 31, 2016. Reference https://www.irs.gov/pub/irsdrop/rp-16-29.pdf

CPE

Related CPE Quiz on Page 29

Peter J. Scalise serves as the Federal Tax Credits & Incentives Practice Leader for Prager Metis CPAs, LLC a member of The Prager Metis International Group. Scalise serves on both the Board of Directors and Board of Editors for The American Society of Tax Professionals (ASTP).

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Updating Your 1040 Tax Software BY JOSHUA FLUEGEL

CPA’s practice thrives on creating a process and then optimizing it for speed and efficiency. The striving for this goal could lead many to neglect a possibly aging technological infrastructure which could be debilitating during tax season. Taking an objective look at your tools of the trade would be a wise endeavor before the heat of the upcoming 2017 tax season. “A tax professional’s profitability hinges on efficiency,” said JoAnn Kintzel, president of TaxAct. “Even small adjustments like increasing your Internet speed, JoAnn Kintzel getting a faster processor, upgrading your operating system and taking advantage of tools like a client portal for secure document exchange can save time. In addition, it may be time to evaluate whether you’re using the right tax preparation software for your practice. Making a switch to a software package that more closely aligns with the number and type of returns you typically handle can provide major cost savings.” The collection of client information has gone mobile through the use of phones and tablets. Of course the use of these devices is only successful when they are secure. “One area where we feel there is still significant room for improvement involves client communications and collaboration as the professionals look for ways to more proficiently preJohn Barnes pare tax returns,” said John Barnes, vice president, product management at Wolters Kluwer Tax & Accounting. “With today’s increased focus on – and threat to – both firm and client data security, tax

20 I A U G U S T/ S E P T E M B E R 2 016

and accounting professionals need to securely interact with clients, quickly gather data, and conduct research. They can do so every step of the way through an assortment of technologies currently available to them, including portals and online tax organizers at the onset of the tax preparation and compliance workflow, and eSignatures at the end.” Catching the essence of someone’s authorization is another challenge that, fortunately, can be remedied by a combination of e-signature and the use of mobile devices. “We see the ability to use technology as a solution for the needs of the remote taxpayer as one of the necessary advances for the tax preparation market over Charles W. Petz the next several years,” Charles W. Petz, CPA, CFO and member of the board of directors at Petz Enterprises. “One of the key challenges on this front is getting signatures in a timely and efficient manner when you have an increasingly mobile and busy customer base. The good news is that with the ubiquity of mobile devices and smart phones we have been able to bridge this gap with ease-of-use tools such as remote signature capture.” “One area that firms can really benefit from is the adoption of an electronic signature solution for the digital signing of Form 8879,” Jon Baron, managing director of the professional segment at Jon Baron Thomson Reuters. “Tax season is becoming more compressed and is already hectic, therefore a solution that can reduce the amount of manual signatures, tracking and client coordination can really help.”

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Effectively handling documents and data is a necessity that can be improved by simply exploring recent advancements in such tools. “There are many options to think about (high speed connections, high dpi scanner, electronic signature apps, to name a few), but I would recommend a secure online document exchange Jamie Stiles solution where you conveniently transfer files to and from clients without printing and mailing,” said Jamie Stiles, president of Drake Software. “One technology that will make a significant contribution to tax prep is the ability to leverage digital ‘source data’ that is already available in multiple locations,” said Jim Buffington, CPA, Jim Buffington customer liaison, ProConnect group at Intuit. “For example, W-2s, 1099s, 1095s information is already available in digital format from payroll providers, brokerages and healthcare companies. Since data collection and data entry comprise about 65% of tax preparation time, preparers can leverage these technologies to enhance productivity and also increase accuracy.” Increasing productivity can be enhanced by practice management and workflow software. “For many sole practitioners and professionals in small tax and accounting firms, the traditional tax season has evolved into a year-round opportunity to provide service and guidance to Satyan Penmetsa their clients,” said Satyan Penmetsa, general manager at Wolters Kluwer Tax & Accounting North America, Small Firm Segment. “Adopting a dedicated practice management software solution gives tax and accounting professionals smarter management of client deliverables and valuable insight into job profitability and revenue opportunity to grow their firm.” Upgrading hardware, improving Internet speed and optimizing software now to enhance your 2017 tax season.

CHART 1040 TAX SOFTWARE COMPARISON CHART TaxAct ProSeries Professional Professional Editions

PRODUCT

ATX

Drake Software

CCH Axcess Tax

CrossLink 1040

Lacerte

Company

Wolters Kluwer

Drake Software

Wolters Kluwer

Petz Enterprises, L.L.C.

Intuit

TECHNICAL SUPPORT

ATX

Drake Software

CCH Axcess Tax

CrossLink 1040

Lacerte

Skip fields based on prior input

Yes

National average comparisons

Yes

Yes. Tax Analyzer product

On-demand calc during input

Yes

GENERAL FEATURES

ATX

Drake Software

CCH Axcess Tax

CrossLink 1040

Lacerte

Billing by Form / Time

Yes

Form

Yes

Add-on modules available

Yes

Network Features

Yes

Cloud

Yes

Multi-user capable

Yes

Included

Toll-free support

Yes

LAN program updates

TaxWise

UltraTax CS

Wolters Kluwer

Thomson Reuters

TaxWise

UltraTax CS

Yes

TaxWise

UltraTax CS

Yes

Enterprise Editions only

Yes

Cloud

Free

Included

Yes

Included

Yes

Cloud

Yes

N/A

Yes

E-mail support

Yes

PRINTING

ATX

Drake Software

CCH Axcess Tax

CrossLink 1040

Lacerte

TaxWise

UltraTax CS

ultiple printer support for M labels, returns and letters

Yes

PDF file creation

Yes

WEB FEATURES

ATX

Drake Software

CCH Axcess Tax

CrossLink 1040

Lacerte

TaxWise

UltraTax CS

Download initial program

Yes

Cloud

Yes

Download updates

Yes

Cloud

Yes

Frequently asked questions

Yes

Searchable knowledge base

Yes

Package tracking

Yes

ELECTRONIC FILING

ATX

Drake Software

CCH Axcess Tax

CrossLink 1040

Lacerte

TaxWise

UltraTax CS

Number of states processed

All

Multi-user version

Yes

Prints rejection reports

Yes

Transmits for other professionals

Yes

Price for network support

Intuit

TaxAct

TaxAct ProSeries Professional Professional Editions

“Someone retiring at age 65 can withdraw funds from 401(k) accounts and IRAs penalty free; the withdrawals are fully taxable unless they relate to after-tax contributions.“ 5 Top Tax Issues for Retirement Continued from page 6

Long-term Care. The cost of longterm care for chronic illnesses (e.g., custodial care for those who cannot manage daily living tasks on their own or who need supervision because of cognitive impairment) is not covered by Medicare. Those who lack recourses may qualify on a needs basis for Medicaid to pay for long-term care. Those who cannot qualify or cannot easily pay for this care out-ofpocket may carry long-term care insurance for this purpose. For federal income taxes, the amount of premiums for long-term care insurance that can be treated as a deductible medical expense is capped by age. In 2016, those who are more than 60 years old but not more than 70, the dollar limit is $3,900; for those 70 and older the limit is $4,870 (Rev. Proc. 2015-53, IRB 2015443, 615). For state income taxes, different rules may apply. For example, in New York, 20% of long-term care insurance premiums are a tax credit against state income taxes (https://www.tax.ny.gov/pdf/current_forms/it/it249i.pdf).

3. Retirement Plans and IRAs Many

spend a lifetime of building up retirement savings in qualified retirement plans, such as 401(k)s and 403(b)s, and in IRAs. Those who made considerable contributions and invested wisely have a nice nest egg for retirement. Those with defined benefit (pension) plans usually begin to receive benefits at age 65 or other age specified in the plan. While there is no requirement to take lifetime withdrawals from Roth IRAs or designated Roth accounts, other tax-advantaged savings plans must adhere to distribution requirements. Early Distributions. Funds can be withdrawn in any amount at any time. However, withdrawals before a certain age may trigger a 10% early distribution penalty (Code Sec. 72). Funds from a qualified plan can be withdrawn penalty free starting at age 55 if the taxpayer is 22 I A U G U S T/ S E P T E M B E R 2 016

separated from service (e.g., is terminated or retires from the job). For IRAs, as well as for qualified retirement plans for selfemployed individuals, the early distribution penalty applies for withdrawals prior to age 59-1/2 unless a special penalty exception (e.g., disability, paying education costs or first-time home buying expenses) applies. Thus, someone retiring at age 65 can withdraw funds from 401(k) accounts and IRAs penalty free; the withdrawals are fully taxable unless they relate to after-tax contributions.

Required Minimum Distributions (RMD). Generally, you must begin to draw

down these retirement savings starting in the year of reaching age 70-1/2. The first RMD can be postponed to April 1 of the following year, but this means taking two RMDs in the same year: the first RMD by April 1 and the second RMD by December 31. Also, if someone is still working for a company and does not own more than 5% of the business, he or she can postpone distributions from the company’s plan until actual retirement even though after age 70-1/2. The rules on figuring distributions and strategies for minimizing taxes on the distributions are not simple, and beyond the scope of this article. More details can be found in IRS Publication 590-B and Reg. Sec. 1.401(a)(9)-5. Those who are age 70-1/2 or older can transfer tax free up to $100,000 annually from an IRA directly to a public charity; these are called qualified charitable distributions (QCDs) (Code Sec. 408(d)(8)). The amount transferred is applied toward RMDs for IRAs for the year. This rule does not apply to SEPIRAs, SIMPLE-IRA, or qualified retirement plans.

as your principal residence for a period aggregating at least two years out of the five years prior to its date of sale. The ownership and use tests can be met during different two-year periods. However, you must meet both tests during the fiveyear period ending on the date of the sale. Generally, you cannot use the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Expensive Homes. If gain is more than the applicable exclusion amount, any additional gain is subject to the capital gains tax (15% for most taxpayers; 20% for those in the top income tax bracket). What’s more, there may be different state or local tax rules. For example, in New York, there’s a so-called “mansion tax” of 1% on sales of homes of $1 million or more (https://www.tax.ny.gov/pdf/publications/real_estate/pub577.pdf). Also, for a high-income taxpayer (income over $200,000 for singles, $250,000 for joint filers, and $125,000 for married persons filing separately), the additional capital gain is subject to the net investment income (NII) tax (Code Sec. 1411). This can mean an additional 3.8% tax on the gain that is not excluded (the amount of the NII tax depends on net investment income and modified adjusted gross income over the income thresholds listed above).

5. Relocating At retirement, some peo-

ple move for a variety of reasons: to be in a warmer climate, to be closer to children and grandchildren, to obtain a lower cost of living. This article is continued on

www.CPAmagazine.com.

CPE

Related CPE Quiz on Page 29

4. Selling a Residence For many se-

niors, retirement means downsizing. This entails the sale of a principal residence. Gain on the sale of a principal residence up to $250,000 ($500,000 on a joint return) is tax free (Code Sec. 121). To qualify for this exclusion, you must have owned and used your home

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Executive Editor Sidney Kess is CPA-attorney, speaker and author of hundreds of tax books. The AICPA established the Sidney Kess Award for Excellence in Continuing Education in his honor, best-known for lecturing to over 700,000 practitioners on tax. Kess is senior consultant for Citrin Cooperman and is consulting editor to CCH.

“Employers need to understand simply paying a person a fixed salary does not automatically make them exempt from being paid overtime.” Department of Labor Releases New Regulations on Overtime Rules

Continued from page 8 commissions) to satisfy up to 10% of the newly established salary level. The DOL published their Notice of Proposed Rulemaking (NPRM) for comment last summer on July 6, 2015. DOL received over 270,000 comments. Several elements of the exposure draft were modified based on the comments received. Some experts in the employment law field have observed that many of them were expecting a short time period between the final ruling and the implementation date. As you will note, DOL has given employers just over a six-month period to implement the revised regulations and modify their pay structure to implement it. There is already some speculation the regulations may become a political issue in Congress and potentially the November elections. Further, some speculate the fourth item above which mandates an automatic adjustment to the salary levels may be challenged in court. Briefly this is how the salary level was set and how it will be revised every three years. The annual salary of $47,476 is based on the 40th percentile of earnings of full-time salaried workers in the lowestwage census region (which is currently the South). The current salary of $23,660 has not been adjusted since 2004. This salary level is one item DOL modified in the final regulations based on the public comments. Another item which was modified in the final regulations was this salary level would be adjusted each three years versus annually. The adjustment of the annual salary amount for this exemption will mostly likely jump significantly again in 2020. This is because the method specified to determine the salary amount is the average of the employees classified as salaried employees. Therefore, if everyone who is eligible to be exempt is paid $47,476 or more, then the average will be higher than this minimum amount. After the recalculation in 2020, we can expect the adjusted

salary amount to stabilize and fluctuate in relationship to market influences. Future automatic updates will take effect on January 1 of 2023, 2026, etc. However, employers should begin evaluating how these new regulations impact their compensation structure and what additional record keeping may be needed. As noted on the DOL website and in the Fair Labor Standards Act (FLSA or Act): “Since 1940, the Department’s regulations have generally required each of three tests to be met for the FLSA’s executive, administrative, and professional (EAP) exemption to apply: (1) The employee must be paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (salary basis test); (2) The amount of salary paid must meet a minimum specified amount (salary level test); and (3) The employee’s job duties must primarily involve executive, administrative, or professional duties as defined by the regulations (duties test).” Items #1 and #3 are essentially unchanged from the current regulations. 1. For item #1 above for a person to be exempt from the OT pay, they must be paid on a salary basis which would be a predetermined fixed amount. However, employers need to understand simply paying a person a fixed salary does not automatically make them exempt from being paid OT. This is a common misconception I find with employers. 2. For item #3 above, the new regulations do not change the duties test in the current law and regulations. See FSLA website: https://www.dol.gov/ whd/overtime/fs17a_overview.htm. DOL is not making any changes to the standard duties test. The Duties Test includes:

Executive Exemption

• The employee’s primary duty must be

managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; • The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; • The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

Administrative Exemption

• The employee’s primary duty must be the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers; • The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Professional Exemption

• The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; • The employee must have advanced knowledge and must be in a field of science or learning;

This article is continued on www. CPAmagazine.com.

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Jerry Love is the sole owner of Jerry Love CPA, LLC in Abilene, Texas. He graduated from Abilene Christian University. In addition to being a CPA, he has also earned the designations of PFS, CFP, CVA, ABV, CITP, CFF, and CFFA. In 2006-07, Love was the Chairman of the Texas Society of CPAs.

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“Indirect methods are by their very nature estimates and courts reject the notion that the IRS should have checked their calculations by other methods.“ IRS Examinations of Businesses

Continued from page 10 can provide the number of guest checks purchased by the restaurant in a year. A projected income can then be determined from the average amount of the guest check times the number of checks. If these methods are used in combination, they strengthen the case. In examining a bar, it is possible the bar owner may remove cash from his or her drawer, purchase liquor off the shelf of a store, sell the drinks in his or her establishment and pocket the profits. (In most states this practice is illegal and bar owners cannot purchase liquor off the shelf or in discount stores.) In such case, there may be no indication in the books that anything is wrong as neither the invoice nor the income touches the books. An indirect method may uncover this.

Specific Items Method of Determining Income Before we begin analysis of

indirect methods we should discuss the specific items method. This method is preferable to an indirect method as it is based upon direct evidence of income. For example, a restaurant owner may receive rebates from a supplier. A copy of the supplier’s invoices and cancelled checks establishes the amount of income from these rebates. The specific items method relies on evidence gathered from source documents, rather than estimates. If records cannot be obtained from the taxpayer, the IRS may contact third parties. The specific items method of establishing income, supplemented by the bank deposit method, is illustrated in Ketler v. Commissioner, T.C. Memo. 1999-68. During 1990 and 1991, Warren Ketler operated two sole proprietorships, including a catering operation doing business as California Barbecue. Mr. Ketler failed to file Federal income tax returns for 1990 and 1991. The Service determined Mr. Ketler’s unreported income for these years by reference to Forms 1099 provided by payers. Prior to trial, the Service obtained 1990 and 1991 bank records for all of Mr. Ketler’s accounts and 24 I A U G U S T/ S E P T E M B E R 2 016

identified various nontaxable transfers and deductible business expenses. Based on this analysis, the Service asked that the Tax Court find increased income tax deficiencies. After trial, the Tax Court found that Mr. Ketler received the income reflected on the Forms 1099. It also found that the Service had properly performed the bank deposits analysis, and, therefore, Mr. Ketler was also liable for increased income tax deficiencies. Kikolos v. Commissioner, T.C. Memo 2004-82, involved liquor store owners, Nick and Helen Kikalos. At the end of each day Mr. Kikalos would receive a bag from his store containing receipts which, among other things, included the cash register tapes (known as “Z tapes”) from the store. The Z tapes from these store registers would have allowed for an accurate calculation of the Kikalos’ gross income. However, after entering the information in his log books, Mr. Kikalos threw away all of the Z tapes. When IRS used a mark-up percentage to figure accurate gross receipts, the Kikaloses wanted to use a different indirect method and filed their petition in court. The court said that arithmetic precision was originally and exclusively in the hands of the Kikaloses, who had simply to keep their papers and data. Having defaulted in this duty, they cannot, in essence, “frustrate the Commissioner’s reasonable attempts by compelling investigation and re-computation under every means of income determination.” The Court said that other indirect methods of estimating the Kikalos’ income are not relevant. Quoting the Fifth Circuit, the court stated, “While the absence of adequate records “does not give the Commissioner carte blanche for imposing Draconian absolutes,” such absence does weaken any critique of the Commissioner’s methodology. Webb v. Commissioner, 394 F.2d 366, 373 (5th Cir. 1968).The court said, “Indirect methods are by their very nature estimates and courts reject the notion that the IRS should have checked their calculations by other methods.”

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Bank Deposit Analysis A bank deposit analysis (BDA) is used to identify deposits that may be taxable, to determine if business expenses were paid from other sources and to determine if business and personal accounts were comingled. The deposited items will show whether cash is deposited. The examiner will analyze the deposits and reconcile nontaxable deposit sources, comparing the total deposit with the reported gross income. If the retail business is cash intensive, where a significant amount of receipts are not deposited and there are many expenses paid with un-deposited cash, a bank deposit analysis would not be a good indirect method for proving income. However the total known deposits should be added to cash expenditures to show the total amount of funds used. This method is best for retailers whose books are unreliable, but who make periodic bank deposits and pay expenses by check. The bank deposits method of establishing income is illustrated in Ng v. Commissioner, T.C. Memo. 1997-248. From 1986 through 1990, Big Hong Ng owned interests in several business entities, including various restaurants. Ms. Ng controlled several bank accounts in the United States and Hong Kong. She commingled her personal funds with those of the business entities in which she had an interest. The Service conducted a bank deposit analysis and determined that Ms. Ng failed to report significant amounts of taxable income during the years in issue. This article is continued on www.CPAmagazine.com.

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Related CPE Quiz on Page 29

Robert E. McKenzie of the law firm of Arnstein & Lehr LLP of Chicago, Illinois, concentrates his practice in representation before the Internal Revenue Service and state tax agencies. He previously served as a member of the IRS Advisory Council (IRSAC) which is a group appointed by the IRS Commissioner from 2009 to 2011.

IRS Penalties and Disputing Penalties Related to Foreign Assets Including Foreign Bank Account (FBAR) Penalties

BY ADAM FAYNE

he IRS has been asserting foreign bank account (FBAR) and other international compliance penalties (i.e. Forms 5471, 8938, 3520, etc.) Adam Fayne outside the Offshore Voluntary Disclosure Initiative (OVDI). At the present time, the OVDI is an indefinite program subject to the advertised terms and conditions. However, not all taxpayers with foreign assets participate in the OVDI and some elect to opt-out of the OVDI after submitting their materials to the IRS through the OVDI process. This article will focus on recent developments when the IRS and the taxpayer disagree on the proposed FBAR penalty, and other international related penalties.

Applicable Penalties Under The Internal Revenue Code

The IRS has the authority to assert international penalties under Internal Revenue Code (IRC) Sections 6038, 6677, and 6679. In addition, IRC Section 6662(j) was recently added to increase the accuracy related penalty from 20% to 40% in those cases where the understatement of tax relates to an “undisclosed foreign financial asset.” This new increased IRC Section 6662(j) penalty applies to those returns filed after March 18, 2010. Some examples of penalties applicable to international compliance requirements are: (this list is not inclusive of all required forms but is a representation of the most common international forms required to be filed by the IRS) • Form 114a (FBAR) – Report of Foreign Bank Account. There is a $10,000 penalty per non-willful violation. For

willful violations the penalty is the greater of $100,000 or 50% of the amount in the account (aggregate total) at the time of the violation. There may be several violations per year depending on the number of accounts, and several years may be subject to the penalty depending on the Statute of Limitations. The IRS issued guidance to limit excessive penalties but this practice is not being followed by all IRS agents. • Form 5471 - Information Return of U.S. Persons With Respect to Certain Foreign Corporations. There is a $10,000 initial penalty plus an additional $10,000 penalty per 30-day period or fraction thereof, after the IRS has mailed a notice of failure to file such form capped at a total of $50,000. There may be additional penalties if the failure to file was intentional. • Form 8865 - Return of U.S. Persons With Respect to Certain Foreign Partnerships. There is a $10,000 initial penalty, plus an additional $10,000 penalty per 30-day period or fraction thereof after the IRS has mailed a notice of failure to file such form capped at a total of $50,000. There may be additional penalties if the failure to file was intentional. • Form 926 - Filing Requirement for U.S. Transferors of Property to a Foreign Corporation (US persons acquiring more than 10% ownership in foreign corporation or transfer of more than $100,000 to a foreign corporation during the tax year). The penalty for failure to file this form is 10% of the fair market value of the property at the time of the exchange/transfer, capped at $100,000 unless the failure was due

to intentional disregard. • Form 3520 - Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. There are a number of penalties that may apply including a penalty of 5% of the amount of a large foreign gift for each month for which the failure continues after the due date capped at 25%, and/or the greater of $10,000 or 35% of the gross reportable amount of any property transferred to a foreign trust or distribution received from a foreign trust. These penalties all continue higher if not cured within a specific time frame. • Form 3520-A - Annual Information Return of Foreign Trust With a U.S. Owner. The penalty for failing to file this form may be 5% of the gross value of the portion of the trust’s assets treated as owned by the US person, and if the failure continues for more than 90 days after the IRS notifies the taxpayer of his or her failure, the penalty is increased by an additional $10,000 for each 30 day period. • Form 8938 - Statement of Specified Foreign Financial Assets. This article is

continued on www.CPAmagazine.com.

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Adam Fayne is an attorney with the law firm of Arnstein & Lehr LLP. Prior to private practice, he was an attorney with the Internal Revenue Service Office of Chief Counsel. He has represented many taxpayers nationally and internationally with IRS examinations, IRS appeals, Tax Court, criminal defense, and foreign compliance matters. He may be reached at 312-876-7883 or asfayne@arnstein.com.

Manage, Enhance and Expand Your Practice A U G U S T/ S E P T E M B E R 2 016 I 25

Practice Management Tips on Serving as Monitor for Aging Clients

Continued from page 16 paying which you will monitor. Few clients realize the exposure a mailbox of bills and checks can create. While many clients might feel secure receiving and depositing checks each step in that process creates exposure that automation can avoid. • Assist clients who are able and interested in automating their checkbook and other basic financial functions. Many older clients will simply not have the interest or ability. Guide these clients to the benefits of having the firm’s staff write up books electronically every quarter (or monthly if appropriate). • Many clients as they age struggle to pay recurring billing. It can often be a simple matter for a practitioner to take over preparing bills, arranging for automatic bill pay of recurring bills. Ideally, setting up a continuum of services that is enhanced as clients age, will give the clients the least cost but most protective result. It will be far easier to take over bill paying for a client for whom you have maintained quarterly electronic records. • Generate reports to the client of these activities so clients who fear losing control over their finances can be reassured they will actually have more control. • Simplify and enlarge reports as vision

issues for a particular client require, the reports sent to the client. Many clients struggle with vision issues to read and handle bills. Substituting that dilemma for a large print, simple format, report will often be incredibly appreciated.

√ Use Your Monitor Role to Guide the Client to Create Checks and Balances

• Arrange, and obtain approval in writing from the client, to submit copies of the periodic reports to another person. That other person might well include an agent under the client’s durable power of attorney (which authorizes that agent to act on behalf of the client if and when the client cannot do so). • Build in checks and balances by having an independent family member other than the agent receive reports. • Assess whether the client has subscribed to third party credit monitoring agencies, and if not whether such a service should be used. Obtaining periodic credit reports for the client may be an inexpensive and useful safeguard regardless of whether the client uses a third party service. • Create procedures for a review of the bills submitted and the general financial data to which you are given access. For example, if new charges are being incurred perhaps they could be highlighted by a staff member calling the client to confirm and/or in a

cover letter to the report. If account activity changes significantly from historic norms that might be a clue to elder financial abuse. The most common and easy to identify is a family member, home health aide or other close person taking an aging client to an ATM on too regular a basis.

√ Formalizing the Monitor Role

• Evaluate whether there is an advantage to the practitioner providing monitoring services in a more formal capacity. • Should you or your firm be formally designated as a monitor in the client’s durable power of attorney and/or revocable trust? While this may not be necessary to the services you provide, it may assure that an agent or trustee seeking to do financial harm to the client might not terminate your involvement at the earliest opportunity. 1 “50 is Peak Age for Financial Decision Making,” Fox Business, September 18, 2015, Serena Elavia.

CPE

Martin M. Shenkman is the author of 35 books and 700 tax related articles. He has been quoted in The Wall Street Journal, Fortune, and The New York Times. He received his BS from the Wharton School of Pennsylvania, his MBA from the University of Michigan, and his law degree from Fordham University.

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Business Directory Call 888-610-1144 today to add company listings Continued from page 27

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Self-study Taxes (3 hours) A basic understanding of tax preparation 3 hours August 1, 2017 1040 Tax and Small Business Accounting

You may earn CPE by studying the articles in CPA Magazine. To be eligible for continuing professional education credit, you should spend approximately three to six hours reading, reviewing and studying the material in the current issue. Then answer the self-study test questions. Certify that you have completed the study requirement for this exam by submitting the test online, or mailing or faxing a signed copy of the test to 817-756-7252. A certificate documenting the CPE credits will be issued for each examination score of 70% or higher.

Certified Public Accountants: Your State Board of Accountancy has final authority on the acceptance of any course for CPE credit for CPAs. Contact your state board if you have any questions concerning their CPE requirements. The student is responsible for selecting courses which meet the board requirements. The CPA Magazine CPE sponsor ID is shown where applicable: AK, AL*, AZ, CA, CT, DC, DE, GA, HI, IA, ID, IN, KY, MA, MD, ME, MI, MO, MT*, ND, NE, NM, NV, OH, RI, SD, UT, VA, VT, WA, WI, WY *Report 50% of the CPE credit shown on CPE certificate

August/September 2016: Answer the following 15 questions and complete the answer sheet on page 31. 1. If a 62-year-old single taxpayer’s income is no more than $25,000, which of the following is true? A. Social Security benefits are subject to an 85% inclusion amount. B. Social Security benefits are tax-free. C. Social Security benefits are subject to an 50% inclusion amount. D. All of the above are false. 2. If “income” is more than the base amount but not more than $34,000 if single, head of household, qualifying widow(er), or married person filing separately who lived apart from his/her spouse for the entire year ($44,000 for joint filers), then ____ of Social Security benefits are includible in gross income. A. 68% B. 85% C. 75% D. 50%

3. Starting in 2017, those age 65 and older by year-end can deduct itemized medical expenses to the extent they exceed ____ of adjusted gross income (AGI). A. 10% B. 12% C. 8.2% D. 9% 4. Funds from a qualified retirement plan can be withdrawn penalty free starting at age 55 if the taxpayer is: A. a government employee. B. the spouse or beneficiary of a taxpayer 65 or older. C. self-employed or a 1099. D. terminated or retired from a job.

Continued on page 30 Manage, Enhance and Expand Your Practice A U G U S T/ S E P T E M B E R 2 016 I 29

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Continued from page 29

5. For what has the salary threshold recently been lifted from $23,660 to $47,476? A. ACA qualification B. Full time employee (FTE) status C. Overtime D. Roth IRA contributions 6. For the FLSA’s executive, administrative, and professional (EAP) exemption to apply, the Department of Labor’s regulations have generally required an employee’s job duties primarily involve those defined by the regulations (duties test). Which of the following is not one of the duties described? A. The employee’s primary duty must be managing the enterprise. B. The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent. C. The employee must have the authority to hire or fire other employees. D. All of the above are duties described. 7. Beginning on January 1, 2020, overtime compensation levels will be automatically revised every: A. 6 months B. Year C. 3 years D. 5 years 8. Which of the following is not an indirect method an IRS examiner may use in an audit when the taxpayers’ records are not available or are inadequate? A. Source and application of funds B. Spouse interview method C. Percentage of markup method D. Bank deposit analysis 9. Which one of the following is incorrect about the bank deposits method, an indirect method an IRS examiner may determine if a taxpayer has underreported his or her income? A. Cash payouts are not deposited, but the money used to make the cash purchases originated from sales. This is cash that would not be deposited into a bank account and must be added back to the bank deposit analysis. B. In a restaurant business cash payment of employee credit card tips is money that is not deposited, but originated from sales. This cash must be added back to the bank deposit analysis. C. Loans from shareholders are taxable. Proof of payment is necessary to establish facts. D. Transfers between bank accounts are non-taxable. 10. The IRS issued Rev. Proc 2016-29, which outlines automatic accounting method changes and provides administrative procedures for electing them. Which of the following is a notable change in Section 11.08, relating to changes for tangible property? 30 I A U G U S T/ S E P T E M B E R 2 016

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A. Section does not apply to amounts paid or incurred for repair and maintenance costs B. Section applies to amounts paid or incurred for repair and maintenance costs C. Section does not apply to amounts paid or incurred for repair and maintenance costs that the taxpayer or his or her spouse is changing from capitalizing to deducting D. None of the above

11. The IRS issued Rev. Proc 2016-29, which outlines automatic accounting method changes and provides administrative procedures for electing them. Section 11.10, relating to the remodelrefresh safe harbor described in Rev. Proc. 2015-56, is modified to provide that the eligibility rules in sections 5.01(1)(d) and (f) of Rev. Proc. 2015-13 do not apply for any taxable year beginning after 2013, and ending before _______ . A. October 31, 2016 B. December 31, 2016 C. July 30, 2016 D. December 31, 2017 12. How much extra may a widowed taxpayer contribute to her traditional IRA if she is 50+? A. $3,000 B. $2,000 C. $1,500 D. $1,000 13. How much extra might a taxpayer contribute to his or her 401(k) if he or she is 50+ and is married filing separately? A. $3,000 B. $5,500 C. $6,000 D. $6,500 14. There is a $10,000 initial penalty, plus an additional $10,000 penalty per 30-day period or fraction thereof after the IRS has mailed a notice of failure to file Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships) capped at a total of: A. $20,000 B. $30,000 C. $50,000 D. $100,000 15. The penalty for failure to file Form 926 – Filing Requirement for U.S. Tranferors of Property to a Foreign Corporation, is 10% of the fair market value of the property at the time of the exchange/ transfer, capped at $100,000 unless: A. the failure was due to intentional disregard. B. the receiving corporation is an S corporation. C. the transferor is a limited liability corporation. D. the property value is under $250,000.

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