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TAXES AT THE OSCARS 16 WAYS TO TURN 1040s INTO PLANNING CLIENTS TAX ISSUES OF LONG-TERM CARE ELECTRONIC SPYING PROTECTION AUDITS AND TAX RETURN RETENTION IRS EXPANDS INSTALLMENT AGREEMENT 4 WAYS TO PREVENT EMPLOYEE EMBEZZLEMENT

GIFTS TO NON-RESIDENT ALIEN SPOUSES CHECKLIST: ELDER FINANCIAL ABUSE TAX ADVANTAGES FOR WORKING CHILDREN

Extended Services Edition 2017 | Vol. 17, No. 2

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EXTENDED SERVICES EDITION 2017

Sidney Kess CPA, J.D., LL.M

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

with Joy Matak,J.D.,LL.M

10 Rick Richardson CPA, CITP, CGMA

Kathleen M. Lach

14 Julie Welch CPA, CFP

16 Adam Fayne J.D.

NEXT ISSUE: Product Reviews Reasonable 1040 Tax Software Small Business Accounting Tax Research Top CPA Apps Manage and Expand Your Practice Cost Segregation Consulting Expert Witness Email Marketing Estates and Trusts Practice Management

e m o c l e W Y

ou made it! That’s another tax season for the books. No doubt extensions had to be filed, but the deluge is hopefully over. How did you do? Did everything go off without a hitch? Did you have a good answer for every question clients and staff threw at you? Hopefully you did. And hopefully you will have all the answers next year because you will recommit yourself to keeping up with the numerous changes and developments in tax. Don’t worry, we can help. This Spring 2017 issue of CPA Magazine features articles from the leading minds in tax to keep you savvy and an expert in your field. Sidney Kess discusses the tax implications of being in long-term care and the various ways you can help your client navigate such a situation and achieve optimal deductions. Martin M. Shenkman knows you want to grow your tax practice. This is why he reveals how your client’s 1040 is the best place to start identifying ideal clients to whom you could offer your extended services. Kathleen Lach reveals the recent adjustments made to the IRS’ Installment Agreement Program. Peter J. Scalise describes ways you may improve your tax research techniques. Mark A. Luscombe takes a look at tax situations movie stars find themselves in and shows what might be learned to help your clients. The aforementioned articles not only keep you up to speed in the current world of tax but are also the content for the CPE course on page 29. Once you have finished this issue of CPA Magazine, you can take the CPE quiz and receive three CPE credit hours. More CPE credit over articles by Sidney Kess and Martin M. Shenkman can be found at www.CPE.CPAMagazine.com.

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ADVISORS

Advantages Children 11 TaxforSidneyWorking Kess, CPA, J.D., LL.M

TAX ADVISOR

Tax Issues of Long-Term Care Sidney Kess, CPA, J.D., LL.M

FEATURES

4 Ways to Prevent Employee Embezzlement

TIFFANY COUCH, CPA/CFF, CFE

Tax Reform for Economic Growth and American Jobs

5 Reasons Why You Won’t See President Trump’s 1040

TAX PLANNING ADVISOR 16 Ways to Turn 1040s into Planning Clients Martin M. Shenkman, CPA, MBA, PFS, J.D. with Joy Matak, J.D., LL.M

4 Ways to Prevent Employee Embezzlement

19 20

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How to Protect Yourself from Electronic Spying Rick Richardson, CPA, CITP, CGMA

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IRS Expands Installment Agreement Kathleen M. Lach

Another Surprise From the Oscars Mark A. Luscombe

GIFT TAX ADVISOR

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Succession Planning – Rational or Emotional? AUGUST AQUILA

JOSHUA FLUEGEL

Cloud Accounting Roundtable Optimize Your Use of Cloud Accounting Software

CHECKLIST: Elder Financial Abuse

PETER J. SCALISE

JOSHUA FLUEGEL

MARTIN M. SHENKMAN, CPA, MBA, PFS, J.D.

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Executive Order Causes ACA Confusion

Tax Research Methodology to Achieve Sustainable Tax Return Filing Positions

Gifts to Non-Resident Alien Spouses Adam Fayne, J.D.

T. STEEL ROSE, CPA

TAX CLIENT ADVISOR

T. STEEL ROSE, CPA

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Tax Issues of Long-Term Care

Long-term care is different from medical treatment designed to cure a condition or illness. Long-term care is meant to address the needs of an individual who, because of a chronic condition, accident or other trauma, or illness, requires assistance with basic selfcare tasks (called activities of daily living, or ADLs, such as dressing and bathing) or other necessary assistance (called instrumental activities of daily living, or IADLs, such as cooking and managing finances). Here are the tax issues related to long-term care.

Long-Term Care Insurance Those who cannot easily afford

to pay for long-term care out of their own resources may want to consider buying long-term care insurance. Generally, this type of coverage provides a fixed daily amount when the insured needs long-term care. The coverage may run for a set term (e.g., three years) or for the life of the insured. For federal income tax purposes, premiums for long-term care insurance are treated as deductible medical expenses up to set dollar limits (Code Sec. 213(d)(10)). For 2017, the limits are (Rev. Proc. 2016-55, IRB 2016-45, 707): • Age 40 and younger: $410 • Over age 40 but not over age 50: $770 • Over age 50 but not over age 60: $1,530 • Over age 60 but not over age 70: $4,090 • Over age 70: $5,110 These limits are per individual, so if both spouses are 72 years old and each has a policy, the dollar limit on their joint return for 2017 would be $10,220. The deduction for itemized medical expenses is based on a percentage of adjusted gross income. For 2017, all taxpayers, including those age 65 and older, the threshold is 10% of adjusted gross income (Code Sec. 213(a)). Seniors had a 7.5%-of-AGI threshold that expired in 2016, but proposed legislation failed to extend this special rule. Retired public safety officers who elect to pay long-term care premiums with tax-free distributions from their qualified retirement plans cannot deduct the premiums. This rule applies where the distributions are paid directly to the insurer but would otherwise be taxable if received by the officers. Self-employed individuals, who can deduct their health insurance premiums as an adjustment to gross income rather than as an itemized deduction, can treat long-term care premiums in the same way (Code Sec. 162(l)). However, only amounts up to the age-related dollar limits can be deducted (Code Sec. 162(l)(2)(C)). Combination policies. The Pension Protection Act of 2010 allows life insurance contracts and commercial annuities to be combined with long-term care coverage (hybrid policies), typically with a rider on a whole life insurance policy or an annuity 6 I E X T E N D E D S E R V I C E S E D I T I O N 2 017 www.CPAmagazine.com

had a 7.5%-of-AGI “Seniors threshold that expired in 2016, but proposed legislation failed to extend this special rule.

”

Tax Advisor

Sidney Kess, CPA, J.D., LL.M

(Code Sec. 7701B(e)). None of the premiums paid for hybrid policies are deductible if they are a charge against the cash surrender value of life insurance contracts or cash value of annuities (Code 7701B(e)(2)). Employer-Provided Coverage. Employer payments of longterm care insurance premiums for employees, spouses, dependents, and employees’ children under age 27 by the end of the year are treated as a tax-free fringe benefit (Code Sec. 106). These premium payments, regardless of cost, are not subject to FICA taxes. HSAs. Funds in health savings accounts (HSAs) can be used to pay for long-term care insurance (IRS Publication 969). These HSA distributions are tax-free to the extent of the agebased limitations discussed earlier. FSAs. A medical flexible spending account (FSA) cannot be used to pay premiums on long-term care insurance (Code Sec. 125(f)). This is not an eligible expense of an FSA. State income tax treatment. States may provide different treatment for the payment of long-term care insurance for state income tax purposes. For example, New York residents can claim a tax credit of 20% of the full amount of long-term care premiums. (https://www.tax.ny.gov/pit/credits/longterm_care_ insurance_credit.htm).

Continuing Care Facilities There is a spectrum of care pro-

vided in different living arrangements ranging from independent living, to assisted living, to skilled nursing care, to intensive nursing home care. The cost of living in a nursing home, which is used primarily for medical reasons, is a deductible medical expense to the extent the care is not covered by insurance or government program. No allocation is needed for medical services; all of the cost, including amounts for food and lodging, are deductible. Those residing in continuing care facilities to receive longterm care assistance may also claim a deduction, but only for a portion of their costs. If this living arrangement is primarily for

personal reasons and not primarily for medical care, only costs related to medical care are deductible. This can be based on the percentage of costs allocated to medical care (see e.g., Rev. Rul. 67-185, 1967-1 CB 70; Rev. Rul. 75-302, 1975-2 CB 86; Rev. Rul. 76-481, 1976-2 CB 82, and Baker, 122 TC 143 (2004)).

Proceeds From Long-Term Care Policies When it is medi-

cally determined that the insured needs long-term care, the policy begins to pay off. If the policy pays a per diem amount without regard to the insured’s needs, only the portion up to a set dollar limit is tax-free. For 2017, this amount is $360 per day (Rev. Proc. 2016-55, IRB 2016-45, 707). However, if the policy has a higher per diem amount, it can be tax-free to the extent of qualified long-term care services for a chronically ill individual. Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services for a chronically ill individual under a plan of care prescribed by a health care practitioner. A chronically ill individual is a person who, within the previous 12 months, has been certified as being either of the following: • Unable to perform at least two activities of daily living without substantial assistance for at least 90 days because of a loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.

• Requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

Proceeds from life insurance policies. A policy may pay accelerated death benefits to the insured. Like proceeds payable on the death of the insured, proceeds payable to an insured who is chronically or terminally ill can be tax-free (Code Sec. 101(g)). Tax-free treatment applies to all proceeds payable on account of a terminal illness (i.e., one expected to result in death within 24 months with some exceptions). Tax-free treatment on account of chronic illness is limited to the amount described earlier for long-term care insurance proceeds. Tax-free treatment also applies to the sale of a life insurance policy in a viatical settlement (Code Sec. 101(g)(2)). This article is continued on www.CPAmagazine.com.

CPE

Related CPE Quiz on Page 29

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, consulting editor to CCH and Of Counsel to Kostelanetz & Fink.

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16 Ways to Turn 1040s into Planning Clients

An individual income tax return can be a treasure trove of planning opportunities and practice development opportunities for practitioners. Many practitioners are concerned about cost issues. Clients will negotiate prices, or complain about a modest increase in tax prep fees every few years, so it seems incongruous that the same client would be willing to spend much more for consultative services, but a meaningful percentage will. Consider some of the planning ideas and suggestions following.

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

with Joy Matak, J.D., LL.M

❏ 1. FILING STATUS A taxpayer’s filing status is the first win- ❏ 3. MARRIED FILING SEPARATE LIABILITY If the taxpayer and dow into planning possibilities. Some taxpayers filing as single may be divorced and subject to a Property Settlement Agreement with a former spouse, which might dictate certain planning. A would-be planner should check lines 21 and 31a of the first page of the 1040 to determine whether the taxpayer is receiving or paying alimony. A planner should consider the effect of any alimony arrangement on the taxpayer’s present and future income stream and incorporate it into the planning. If you communicate with this particular client, or a group of clients via a templated letter, some of the questions to ask about the post-divorce situation might include: a. Have you updated your beneficiary designation? The divorce may not preempt that and if you don’t change the beneficiary designation (unless the settlement restricts that) your ex may well inherit. Lots of people forget this as evidenced by the cases fighting over this each year that make it to court. b. When is the last time you have reviewed the agreement to be certain you and your ex are complying? While CPAs are not likely to review legal issues there are often plenty of tax and economic issues they can address. c. Was life insurance required under the agreement? Is it in force? How do you know? Might it be handled better?

❏ 2. HEAD OF HOUSEHOLD STATUS Taxpayers who file as

head of household may also be subject to a Property Settlement Agreement with a former spouse and may also have the same concerns as a single taxpayer. Since this client has a child, other issues arise. a. Has the client updated his or her will to name a guardian? b. Who is the account owner on any 529 college savings plans? Many clients don’t realize that an ex-spouse (if named account owner) can pull out all the funds. 8 I E X T E N D E D S E R V I C E S E D I T I O N 2 017 www.CPAmagazine.com

spouse are filing separately might this be because one of them is in the midst of a substantial lawsuit? If so there may be a host of things that can be done (and that should not be done). Discuss asset protection issues, and if advisable recommend the client consult with an estate planning or bankruptcy attorney. The litigator may have little expertise with these matters and while handling the litigation may not be focused on broader issues. The most important advice, which many clients do not understand or imagine, is that if subject to suit, that spouse may not be permitted to change the title to assets (e.g., deed the house from joint to solely the spouse not being sued). Inappropriate transfers might subject the spouse being sued to worse results. Perhaps any parent or other benefactor can revise their wills to assure any assets bequeathed to the client being sued are to be held in appropriately protective trusts.

❏ 4. MARRIED FILING SEPARATE MEDICAL CONSIDERATIONS

Where the taxpayer and spouse have chosen to file separately in order to take advantage of one spouse’s large medical deductions and lower AGI, a planner should recommend that the taxpayers meet with their estate planning and review existing, or execute new, durable powers of attorney and health proxies. Review planning for medical expense deductions. a. Is the client able to qualify for a full or partial payment under a disability policy?

❏ 5. MARRIED FILING SEPARATE CONSIDERATIONS A pre-

parer should determine why a taxpayer is filing as married filing separately. If the taxpayer is separated, the preparer should coordinate with matrimonial counsel to provide such assistance as may be required for the taxpayer’s benefit. a. Some taxpayers file separately because they were advised long

ago before they entered the marriage to do so to keep assets separate. b. Does that still make sense? c. What is the penalty in terms of tax cost from this decision? Are there other options?

❏ 6. MARRIED TAXPAYERS CONSIDERATIONS

In the case where the taxpayer is married but subject to a prenuptial or postnuptial agreement governing their financial arrangements, a preparer should obtain a copy of the agreement. The preparer should review the agreement to determine the following: a. What financial obligations does the agreement create? b. Are there specific insurance requirements? c. Is there a better tax method to achieve the goals of the prenuptial or postnuptial agreement? If the taxpayer intends to keep certain assets separate, then, instead of filing separately and potentially having a greater tax liability, proper recordkeeping may be a solution. By way of example, assume that a prenuptial agreement provides that certain investment assets are separate property but the income earned is applicable to marital expenses. Arranging for automatic transfer of the income from the separate accounts to a joint checking account keeps the assets separate while making the income available. All taxpayers regardless 1of4/6/17 filing10:18 status 17CAlCPAmaghalfad.qxp_Layout AMshould Page 1also consider

asset protection planning in order to protect assets from future creditors and predators. There may be simple changes, e.g., owning the marital home jointly to provide a measure of protection. Many states provide that a residence owned by husband and wife receives some measure of protection from either spouse’s claimants. The house may have been held as tenants in common to fund a bypass trust. That decision may have been made before the advent of portability (or repeal of the estate tax) and may never have been revisited. This article is continued on www.

CPAmagazine.com.

CPE

Related CPE Quiz on Page 29

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. Joy Matak, J.D., LL.M is the CohnReznick Trusts and Estates National Practice Co-Leader and provides wealth transfer strategies to assist high networth families accomplish asset protection, tax planning and business succession goals.

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How to Protect Yourself from Electronic Spying

Not only should you make "sure your operating system

WikiLeaks recently published a massive trove of what appear to be CIA spying secrets. The files are the most comprehensive release of US spying files ever made public, according to Julian Assange. In all, 8,761 documents account for, “the entire hacking capacity of the CIA,” Assange claimed in a release. Already, the files include far more pages than the Snowden files that exposed the vast hacking power of the NSA and other agencies. This article discusses approaches you can take to protect yourself and your data from anyone (including the CIA) trying to pry into your personal life.

Android Devices Did

you check your device? You should. Google estimates that about 30% of all Android users, which equates to about 420 million people, are using some variation of Android 4.0. Google is also focusing on investigating all reports of any security issue that was noted in the WikiLeaks release, but what’s done is done. With the information available today, the best thing that you can do is to stop holding off on updating your mobile device software. Not only should you make sure your operating system is up to date, but you should also make sure your apps are as current as possible. If you have an older Android device, this might be easier said than done. For instance, older devices such as the Samsung Galaxy S3, can’t download the latest software. If you are in this situation, it is probably a good idea to upgrade to a new smartphone. You don’t have to get an expensive one, of course, just make sure you can load it with the latest software and security updates. The final thing you should do if you use an Android device is to make sure you are using the lock screen and the PIN code features. You should also consider using the Verify Apps setting on the device. This will scan any app is downloaded from a source outside of the Google App store. This is the best way to keep malware off your device.

iOS Devices When it comes to updating devices, iPhone and

iOS users are much better at keeping their devices up to date. If you have an iPhone, iPad or other iOS device, odds are your device is already updated with the latest version of the iOS operating system. However, you should check, just to make sure. When we look at the documents supplied by WikiLeaks regarding the iOS operating systems, we see people who are using iOS 9 or 10, which is about 84% of all iOS users, are generally not targeted. When we look at the numbers, there are more than 10 I E X T E N D E D S E R V I C E S E D I T I O N 2 017 www.CPAmagazine.com

is up to date, but you should also make sure your apps are as current as possible.

Technology TBD Advisor Advisor Rick Richardson, CPA, CITP, CGMA a billion iOS-powered devices in the world, so about 50 million people are using outdated software. These are the people who should worry. Even if you have iOS 9, consider updating to iOS 10, which is the latest version of the iOS software. Also, many people will update their iPhones, but forget to update their iPads. Make sure to do both. Apple released a statement soon after the leak saying that most of the security issues that were noted from the WikiLeaks documents were already patched. They are working hard to address any other issues as well. Like the Android devices mentioned above, some Apple devices cannot download the latest iOS 10 operating system. If you have an iPhone 5, iPhone 6 or iPhone 7, you can download the latest iOS. If you have an iPad Air or newer, or an iPad Mini 2 or newer, you are also good. However, if you use an Apple device older than those, it’s probably time to update to a new device, which will give you more security.

Samsung TV

If you have a Samsung television, you also have to be vigilant, but the situation isn’t as clear as it is with mobile devices. The WikiLeaks documents show that there are hacking programs that are mostly attacking the Samsung F8000 series, which have microphones to enable voice controls.

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.

Tax Advantages for Working Children

BY SIDNEY KESS, CPA, J.D., LL.M

ith summertime approaching, many children will be getting jobs during their school break. Others will continue at their part-time jobs throughout the summer months. What does a child’s work mean to the child and his or her family from a tax perspective?

Tax Considerations for Children A child can earn for the year up to the amount of the standard deduction for his or her filing status. For 2017, this amount is $6,350 for a single individual (Rev. Proc. 2016-55, 2016-45, 707). Thus, a child can earn over $18 per hour (based on a 35-hour week for 10 weeks) without any income tax on the earnings. The “kiddie tax,” which subjects a child’s income over a threshold amount to the tax rates of the parent, only applies to unearned (investment) income and not to earned income (Code Sec. 1(g)). A child who expects to owe no federal income tax can file an exemption from income tax withholding on Form W-4, Employer’s Withholding Allowance Certificate. This exemption can be used only if the child had no tax liability in the prior year and expects none this year. Of course, exemption from income tax withholding has no effect on Social Security and Medicare taxes (FICA). A child must still pay these taxes on any amount of earnings (unless the child works for a parent’s company as explained later). Thus, the child’s wages are reduced by 7.65% for FICA taxes. The child can use his or her earnings to fund an IRA or Roth IRA. The contribution limit for 2017 is $5,500 (Code Sec. 219; Notice 2016-62, IRB 2016-46, 725). If the child opts to use a traditional IRA, then earnings up to $11,850 ($6,350 + $5,500) are tax-free.

The contribution need not be made by the child, who can save or spend his or her earnings. The contribution can, for example, be made by a parent or grandparent, to the child’s account up to the lesser of the child’s earnings or $5,500. If it becomes necessary to tap into the IRA in order to pay for higher education, the distributions are taxable, but there is no 10% early distribution penalty in this case (Code Sec. 72(t)(2)(E)). Usually, because of the long savings horizon until retirement and the child’s low income, it may be better to contribute to a Roth IRA (Code Sec. 408A). No deduction can be claimed for the donation, but earnings become tax-free. If the child does not want to be saddled with investment decisions or risk any losses, contributions can be made to a myRA, which is like a mini-Roth IRA. More information about myRAs can be found through the Treasury (https://myra.gov/). The child cannot claim the retirement saver credit, which allows taxpayers to double dip (i.e., get a tax break for the contribution and a tax credit) (Code Sec. 25B). The credit is barred to anyone who can be claimed as another taxpayer’s dependent.

Tax Considerations for Parents The fact that a child works and earns money does not prevent the parent from claiming a dependency exemption for the child ($4,050 in 2017). As long as the child is under age 24 and a full-time student, and the child does not provide more than half of his or her support, has the same principal place of abode and is a member of the parent’s household (when not away at school or for other temporary purpose) the exemption can be claimed (Code Sec. 152(c)).

If child support is being paid on behalf of this child, working at a summer job usually does not affect the amount of payments. However, parents should check their divorce or other relevant agreement to determine whether a child’s working has any impact on child support.

Putting Your Child on the Payroll It can be a win-win situation for a parent who owns a business and hires his or her child for the summer. The child earns income and gains work experience. The parent gains a tax advantage and enjoys the additional help. The parent can deduct wages paid to a child as a business expense. A deduction is allowed only if the compensation is reasonable for the work performed. It is advisable to document the hours worked and the type of services performed by the child in case the IRS questions the parent’s return. For example, in one case where a parent with a tax preparation business used her three children to do clerical work, she was denied a deduction for payments because she did not issue them paychecks and could not show any correlation between work performed and the amount of the payments (Ross, TC Summary Opinion 2014-68). If the parent is a sole proprietor or a partnership in which each parent is a partner, wages paid to a child under age 18 are exempt from FICA (Code Sec. 3121(b) (3)(A)). Wages paid to a child under age 21 are exempt from FUTA (federal unemployment tax) (Code Sec. 3306(c) (5)). This article is continued on www.

CPAmagazine.com.

CPE

Related CPE Quiz on Page 29

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IRS Expands Installment Agreement Individual taxpayers with an "assessed balance of tax, penalty

and interest between $50,000 and $100,000 may take advantage of accelerated processing of their installment agreement request.

The IRS is rolling out a new test program for streamlined installment agreements which runs through September of 2017. It will then make a determination whether it will become permanent. A “streamlined” installment agreement program was originally put in place by the IRS for taxpayers with outstanding tax liabilities of less than $25,000. Under this program, a taxpayer would qualify for a payment plan to address unpaid taxes without providing detailed financial information to the IRS, and without being subject to its determination on how much disposable income he had each month to pay toward the debt. Taxpayers were automatically granted the agreement to pay the tax with payment terms extending a maximum of 60 months. In 2012, that program was expanded to include taxpayers with liabilities of less than $50,000, and the terms were extended to a maximum payment period extending up to 72 months, again without having to provide detailed financial information, and without being subject to the IRS’ determination on how much a taxpayer could afford to pay each month based on his financials. Whether due to diminished resources at the agency, or the need to improve collection efforts, the terms of the streamlined program are again expanding. Under the new parameters, individual taxpayers with an assessed balance of tax, penalty and interest between $50,000 and $100,000 may take advantage of accelerated processing of their installment agreement request. The taxpayer’s proposed monthly payment must be greater than his total assessed balance divided by 84, or the amount necessary to fully satisfy the liability by the Collection Statute Expiration Date. Both the threshold for qualification under this program, and the time to pay, have been significantly expanded. During this test period, this expanded criteria for streamlined processing will only be available for installment agreement requests submitted to Small Business/Self Employed (SB/SE) Campus Collection Operations (including the Automated Collection System), and will not be available for requests submitted to Wage & Income Accounts Management, SB/SE Field Collection or through the Online Payment Agreement application. The following chart summarizes the current program, and changes within the test program for individual taxpayers who have filed all required returns and have an assessed balance of tax, penalties and interest of $50,000 or less. The test criteria also apply to defunct businesses with tax debts up to $25,000, 12 I F A L L 2 016

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Tax Planning Advisor

Kathleen M. Lach

and defunct sole-proprietorships with tax debts up to $50,000. For in-business taxpayers, test criteria apply to income tax debts only, up to $25,000. See Chart A The second chart shows the changes for individual taxpayers who have assessed balances between $50,001 and $100,000. The test criteria also apply to all out of business sole-proprietorship tax debts between $50,001 and $100,000. See Chart B A taxpayer may request a payment arrangement by filing Form 9465, Installment Agreement Request, with the IRS. Streamlined arrangements may also be made by visiting a walkin center, or by phone. The fees for entering into such an agreement have increased for 2017. See Chart C A taxpayer may qualify for a reduced fee of $50 if his income is below a certain level. A determination on the reduced fee is made using Form 13844, Application for Reduced User Fee for Installment Agreements. It is also important to remind your clients that interest and late payment penalties on any tax not paid by its due date continue to accrue even if the request to pay in installments is granted. Further, if payments are late, or a new liability is assessed on a later return, the agreement will be in default, and the IRS may take enforcement actions, such as filing a Notice of Federal Tax Lien or an IRS levy action, to collect the entire amount owed. See charts on page 13

CPE

Related CPE Quiz on Page 29

Kathleen M. Lach is a Partner in the Tax and Litigation Departments of Arnstein & Lehr LLP. She represents clients before a variety of different tax authorities, including the Internal Revenue Service, the Illinois Department of Revenue, and the Illinois Department of Employment Security.

Current Streamlined Criteria

Test Criteria

Payment Terms

Up to 72 months – or – the number of months necessary to satisfy the liability in full by the Collection Statute Expiration Date, whichever is less

None. This criteria is unchanged.

Collection Information Statement

Verification of ability to pay required in event of an earlier default for assessed balances of $25,001 to $50,000.

Not required.

Payment Method

Direct debit payments or payroll. Deduction Direct debit payments or payroll. Deduction is required for assessed balances of $25,001 preferred, but not required. to $50,000.

Notice of Federal Tax Lien

• Determination not required for assessed balances up to $25,000. • Determination is not required for assessed balances of $25,001 - $50,000 with mandatory use of direct debit or payroll deduction agreement. Note: If taxpayer does not agree to direct debit or payroll deduction, then they do not qualify for Streamlined IA over $25,000.

• No change in criteria for assessed balances up to $25,000. • Determination is not required for assessed balances of $25,001 - $50,000 with the use of direct debit or payroll deduction agreement. Note: If taxpayer does not agree to direct debit or payroll deduction, then they do qualify for Streamlined IA over $25,000, but a Notice of Federal Tax Lien determination will be made.

Current Criteria

Test Criteria Changes

CHART B - $50,001 and $100,000 Payment Terms

None - Streamlined processing criteria currently does not apply to assessed balances of tax between $50,001 and $100,000.

Up to 84 months – or – the number of months necessary to satisfy the liability in full by the Collection Statute Expiration Date, whichever is less

Collection Information Statement

None

Not required if the taxpayer agrees to make payment by direct debit or payroll deduction.

Payment Method

None

Direct debit payments or payroll deduction is not required; however, if one of these methods is not used, then a Collection Information Statement is required

Notice of Federal Tax Lien

None

Determination is required.

CHART C - Type of Installment Agreement

New Fee

Prior Fee

Regular installment agreement

$225

$120

Regular direct debit installment agreement

$107

$52

Online payment agreement

$149

N/A

Direct debit online payment agreement

$31

N/A

Restructured or reinstated installment agreement

$89

$50

Low-income rate

$43

N/A

SOURCE: www.irs.gov

CHART A - $50,000 or Less

Audits and Tax Return Retention

IRS has six years "Theto audit a return

“How long should my client keep his/her tax returns and supporting documentation?” is a frequently asked question. The safe, quick answer is keep old tax returns, W-2s, and information with tax planning relevance permanently. Keep less important supporting documentation for seven years. Generally, the IRS has three years from the due date of the return to audit and adjust the return. Similarly, your client has three years following the due date to amend his return. The due date for your 2016 tax return was April 18, 2017. Even if you filed a return on March 1, 2017, the IRS has until April 18, 2020, to audit the return. You have until April 15, 2020, to amend the return. If you extend the due date of the return, the period of time the IRS has to audit your client’s return and the period of time you have to amend the return are also extended. Sometimes the IRS has longer than three years to audit a return. For example, the IRS has six years to audit a return if a person fails to report over 25% of gross income. If a return is not filed, or a fraudulent return has been filed, the IRS can audit records for that tax year at any time. Supporting documentation should be kept, including summaries, cancelled checks, receipts, and 1099s for at least the three years following the due date of the tax return. To be safe, many advisers recommend these records be kept for seven years. Tax returns and W-2s should be kept permanently. Keeping a tax return permanently provides support if the IRS contends your client did not file a return or filed a fraudulent return. Furthermore, you may need to refer to an old return to obtain information about: • Home purchases and sales • Depreciation of a home office, rental property, or business equipment • Individual retirement account (IRA) contributions • The purchase price of stocks, bonds, and mutual funds • The taxability of pensions and annuities Keep W-2s permanently because they include important information about Social Security wages and withholdings and income tax withholdings. If you ever need to prove earnings or Social Security and Medicare contributions, you will have the records if W-2s are kept.

Supporting Documentation

Generally, most records can be destroyed after seven years. For tax planning support, however, there are countless situations 14 I S U M M E R 2 015

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if a person fails to report over 25% of gross income.

Tax Client Advisor Julie Welch, CPA, CFP

when it is desirable to have records from earlier years. For example, when a client sells a home, it is necessary to calculate their gain. To calculate the gain, you need records of the cost of the home, improvements to the home, and depreciation of the home. For some people, this information may go back forty years or more. Furthermore, if you rolled over the gain on the pre-1998 sale of your prior home, it is necessary to have records for the prior home. Another example of when earlier records are helpful is when your client sells mutual funds. There are several planning strategies you can use to reduce your client’s gain in this situation. To use them, however, it is necessary to have information about purchases, distributions, and sales from earlier years. In summary, you should never throw out tax returns; W-2s, and records might have future tax relevance. In particular, you should keep all home records, brokers’ statements for securities you still own, and retirement plan information. You should keep other tax-related records for seven years. NOTE: A current Earnings and Benefit Statement can be requested on the Internet at www.socialsecurity.gov. Earnings records should be verified frequently. Errors discovered after three years have passed are difficult to correct. Also, socialsecurity.gov can be used to get an estimate of future Social Security benefits based on an actual Social Security earnings record.

Find more articles by Julie Welch at www.CPAmagazine.com.

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.

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Manage, Enhance and Expand Your Practice E X T E N D E D S E R V I C E S E D I T I O N 2 017 I 15

Gifts to Non-Resident Alien Spouses

The primary distinction “practitioners must look

Some United States taxpayers are married to individuals who for is a gift versus are not residents of the United States, and not otherwise a citian exchange. zen or subject to United States tax laws. We believe it is clear that there is no income recognized when a United States citizen gifts appreciated securities to his or her non-resident alien spouse. While we believed that to be the case before the recent United States Tax Court decision, the Hughes case made clear that a United States taxpayer’s gift of securities, for nothing in return, is not subject to income recognition. Adam Fayne, J.D. In Hughes v. Comm’r, T.C. Memo. 2015-89 (May 11, 2015), the Tax Court held that the gift of appreciated shares to the donor’s non-citizen and non-resident wife was at 19. The taxpayer in Hughes argued Davis applied, which not a taxable event for income tax purposes (and there was entitled the taxpayer to a basis adjustment in the gifted shares. no adjustment to the shares as a result of the gift). The Tax The Tax Court disagreed. Hughes at 21-22. Court made clear “[s]ection 1041(d) simply restores the status Despite the above cases, the Internal Revenue Service has, quo when the recipient spouse is on occasion, taken the position a non-resident alien, such that that a gift of appreciated securiordinary recognition rules apply ties from a United States taxpayer “In Hughes v. Comm’r, T.C. Memo. 2015to the transferor and transferee. to a non-resident alien spouse 89 (May 11, 2015), the Tax Court held If the transferor spouse has a reis a taxable event under Davis. alized gain or loss, and no other Apart from this being a complete that the gift of appreciated shares Code section provides for noncontradiction to the arguments to the donor’s non-citizen and nonrecognition, then that gain or made by the Internal Revenue loss must be recognized.” Hughes Service in Hughes, it is clear from resident wife was not a taxable event at 22 (emphasis added). the Tax Court that Davis does for income tax purposes.” The key point made by the not apply. See Id. Specifically, court in Hughes is that ordinary the Tax Court stated “…Davis recognition rules continue to apis inapposite because it involved ply under Section 1041(d). “Where, as here, an interspousal an exchange, not a gift...” Hughes at 22. The primary distincproperty transfer takes the form of a gift, no gain is realized, so tion practitioners must look for is a gift versus an exchange. A regardless of whether Section 1041(a) applies, there is no gain practitioner must be aware of a taxpayer that gives shares to his to be recognized.” Hughes at 23. The Code imposes income or her spouse, whereas Davis involved an exchange incident tax on an individual’s taxable income. “As a general matter, to divorce. Hughes at 25. As the Tax Court stated in Hughes, a donor does not realize income from making a gift.” Id. The these factual distinctions are material. Hughes at 27. Tax Court then concluded that in the case of Mr. Hughes’ gift of appreciated stock to his non-resident, non-citizen spouse that “neither spouse realized income, and thus neither spouse Adam Fayne is an attorney with the law firm of Arnstein & Lehr LLP. could recognize income. The gifts were not income taxable Prior to private practice, he was an attorney with the Internal Revenue Service Office of Chief Counsel. He has represented many taxpayers events.” Hughes at 24-25. nationally and internationally with IRS examinations, IRS appeals, Tax The Internal Revenue Service argued (and the Tax Court Court, criminal defense, and foreign compliance matters. He may be agreed) that the gifts did not result in taxable income. Hughes reached at 312-876-7883 or asfayne@arnstein.com. 16 I E X T E N D E D S E R V I C E S E D I T I O N 2 017 www.CPAmagazine.com

”

Gift Tax Advisor

4 Ways to Prevent Employee Embezzlement

BY TIFFANY COUCH, CPA/CFF, CFE

t’s that time of year again. You are fully in the swing of tax season, counting the days until April 18, frustrated that your clients are not bringing in their financial documents. Have you considered that the delay may be the result of their inability to get financial information from their trusted bookkeeper? I recently had a conversation with a potential client whose bookkeeper stalls each time he asks her for documents. He described it as “pulling teeth” to get anything from her. His CPA urged him to call me because the client feels that cash flow “just doesn’t seem right” even though sales have increased in the last year. When I told him I’d be happy to help and perhaps we should just start with the bank statements, cancelled check images and QuickBooks, the phone went silent. “I can’t ask her for that,” she said. “She’ll think that I don’t trust her if I start asking questions.” When I told him that I was concerned that some of what he was telling me are common indicators of employee embezzlement, he scoffed. “She would never do that to me.” These comments are not uncommon for me to hear in my forensic accounting office and they are the primary reason why frauds go undetected for so long. The first rule in understanding employee embezzlement is understanding that perpetrators rely on their ability to be liked and trusted to gain access to your client’s funds. If you asked any of my clients, before the fraud was found, who the most trusted employees in their organization were, the fraudster would be at the top of the list.

The second rule in understanding employee embezzlement is understanding that fraudsters will use everything from, “I’m too busy” to “How dare you ask me questions” to “You don’t trust me?” to resist providing documents to the very business owners who provide them steady employment. Our clients are nice people who are relieved to have someone so trustworthy to do the involved work of daily accounting necessary to run a business. They are so nice, in fact, that they are often afraid to “rock the boat” with their trusted bookkeepers.

“On average, asset misappropriation schemes are in excess of $150,000 and have been ongoing for 18 months before they are detected. “ On average, asset misappropriation schemes are in excess of $150,000 and have been ongoing for 18 months before they are detected. It is my contention that CPAs who prepare taxes for small business could be serving as a first line of defense in uncovering these schemes faster. As your small business clients come in this year to drop off documents or pick up their tax returns, I encourage you to consider adding value to those engagements, and your clients’ businesses, by considering the following as part of your annual tax engagement:

If the client uses QuickBooks, consider running an Audit Trail Report before you run their trial balance report. The features within this report bold and italicize transactions that have been changed or

deleted. Identify whether any changed or deleted transactions look unusual or may indicate fraud could be occurring (e.g. deleted deposits, a check written to an employee or suspicious vendor with the payee name later changed to a legitimate vendor, payroll checks changed).

Ask the client to bring in their bank statements and cancelled check images for the 12-month tax period. Review those statements to ensure that all debit transactions and payee names on cleared checks are for your client’s business purposes (i.e. verify there is no unauthorized use of your client’s funds).

Verify that sales posted to your client’s ledger match deposits to their bank account. If there are shortages, could this be a sign of a potential cash/check skimming scheme?

Have a brief conversation with your clients on the importance of simple but effective controls for the prevention of fraud (e.g. review bank statements and cancelled check images, separating customer invoicing from banking duties, reviewing payroll reports after payroll is processed). You may receive pushback from your clients at first, but arm yourself with the facts and remind them that these steps are necessary to avoid suffering the heartbreak or financial loss associated with a thief in their company.

Tiffany Couch, CPA/CFF, CFE is a nationallyrecognized forensic accountant and author of The Thief in Your Company, an intimate look at the financial and emotional impacts of insider fraud. For more information, visit www. tiffanycouch.com

Manage, Enhance and Expand Your Practice E X T E N D E D S E R V I C E S E D I T I O N 2 017 I 17

Tax Reform for Economic Growth and American Jobs BY T. STEEL ROSE, CPA

resident Trump announced “the biggest tax cut” in U.S. history on April 26. The one-page plan provides 12 bullet points to simplify the tax code and reduce taxes. Six points in the one-pager worth remembering are: Reducing the number of individual tax rates to three: 10%, 1 25% and 35% from seven: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.

Doubling the standard individual tax deduction to $12,700 2 for single filers and $25,400 for joint filers.

3 R epealing the alternative minimum tax (AMT), increasing the tax burden in states with high income taxes. 4 Eliminating the estate tax. 5 R epealing the 3.8% Obamacare tax on net investment income on incomes generally above $200,000 and return the top tax rate on capital gains and dividends to 20%. 6 Reducing the tax rate to 15% from 35% for businesses, presumably for corporations, and extending it to S corporations, partnerships, and entities taxed as partnerships.

5 Reasons Why You Won’t See President Trump’s 1040 BY T. STEEL ROSE, CPA

resident Trump has undergone some criticism for not releasing his tax returns to the press and public as presidents have done in the past. Here are five reasons why President Trump may not want or be unable to release his returns.

1 Some of President Trump’s returns are under audit.

3 Carryforward and carryback losses and gains could be impacted. Opponents of President Trump could recommend IRS action on closed items.

4 It is not legally required that candidates for public office release any tax returns.

Public opinion on tax returns while the IRS is reviewing the returns would complicate the audit for Trump and the IRS.

5 Trump once suggested the IRS is targeting him. One theory

2 Releasing returns to the public who often do not under-

Learn more about what information previous presidents have provided the public at http://www.taxhistory.org/www/ website.nsf/Web/PresidentialTaxReturns

stand a simple 1040 would create questions on topics ranging from AMT to NOLs with no definitive answers.

18 I E X T E N D E D S E R V I C E S E D I T I O N 2 017 www.CPAmagazine.com

says he ran for president to help reduce the IRS’ harassment of his businesses.

The plan will depend on stakeholders and Congress developing details that will provide “massive tax relief, create jobs, and make America grow again,” according to the one-pager. The remaining six points are less specific and range from, “providing tax relief to help families with child and dependent care expenses,” to, “eliminating most of the tax breaks that mainly benefit high-income individuals.” According to a statement by Gary Cohn, President Trump’s chief economic advisor and director of the National Economic Council, “home ownership, charitable giving, and retirement savings will be protected – but other tax benefits will be eliminated.” The “Business Reform” section includes points imposing a one-time repatriation tax that would permit U.S. companies to bring back trillions of dollars held overseas at a previously proposed 10% rate. Two points require the most clarification and relate to eliminating tax breaks for special interests and a territorial tax system to level the playing field for American companies. The details may consume the rest of 2017 but it appears business tax cuts are coming and those cuts will not be limited to regular corporations. Therefore, relinquishing subchapter S elections or converting partnerships or limited liability companies to regular corporations is premature especially since the plan is not expected to be retroactive for 2017. Over the last 40 years the words, “tax simplification,” has meant employment insurance for CPAs. Although the rhetoric from Gary Cohn does represent a broadside to impact the simplified tax prep industry, Cohn noted in his statement, “In 1935, we had

a one-page tax form consisting of 34 lines and two pages of instructions. Today, the basic 1040 form has 79 lines and 211 pages of instructions. Instead of a single tax form, the IRS now has 199 tax forms on the individual side of the tax code alone. Taxpayers spend nearly 7 billion hours complying with the tax code each year, and nearly 90% of taxpayers need help filing their taxes.” Cohn’s statement continues, “We are going to double the standard deduction so that a married couple won’t pay any taxes on the first $24,000 of income they earn. So in essence, we are creating a 0% tax rate for the first $24,000 that a couple earns. “The larger standard deduction also leads to simplification because far fewer taxpayers will need to itemize, which means their tax form can go back to that one simple page.” The one-pager began with a section titled “Goals For Tax Reform.” Bullet points describing the goals included: Simplify our burdensome tax code; Provide tax relief for American families—especially middle income families; and lower the business tax rate from one of the highest in the world to one of the lowest. Reiterating the main goal, Cohn stated, “Job creation and economic growth is the top priority for this Administration, and nothing drives economic growth like capital investment.” The one-pager concludes with a section titled “Process,” describing the plan wherein the Trump Administration will continue working with the House and Senate to develop details of the plan than can pass both chambers. Let the Congressional lawmaking games begin.

Executive Order Causes ACA Confusion

n his Inauguration Day, President Trump issued an Executive Order (EO) with the stated intent of minimizing the economic burden of the Affordable Care Act (ACA) pending repeal. The uncertainty arises from the IRS’ position that they will “allow electronic and paper returns to be accepted for processing in instances where a taxpayer doesn’t indicate their coverage status.” Line 61 on Form 1040 asks taxpayers to indicate whether they have minimum essential coverage. If the box is not checked, taxpayers are expected to do one of two things: 1 Claim an exemption from the individual shared responsibility payment on Form 8965; or 2 Calculate and report their individual shared responsibility payment. While the AICPA has no position on this issue, Vice President of Taxation Edward Karl uses the AICPA’s

tax ethical standards, the Statements on Standards for Tax Services (SSTS), to determine that compliance is still critical. The IRS’ response is very clear, “… legislative provisions of the ACA law are still in force until changed by Congress, and taxpayers remain required to follow the law and pay what they owe.” Karl suggests you explain the EO and the IRS’ response to your clients, but then follow existing law: (a) minimum essential coverage; (b) an exemption; or (c) reporting the payment. Otherwise, you cannot sign the return. Although the IRS will continue to process returns where coverage status is not indicated, including those expecting a refund, it may follow up with taxpayers on these so-called silent returns at a later date. Quoting Abraham Lincoln, “You cannot escape the responsibility of tomorrow by evading it today.” Karl suggests you do the right thing today before an IRS notice winds up on your client’s doorstep.

Manage, Enhance and Expand Your Practice E X T E N D E D S E R V I C E S E D I T I O N 2 017 I 19

Succession Planning – Rational or Emotional? BY AUGUST AQUILA

he larger the firm, the more rational succession planning is. Partners in large firms know from the beginning what the process is like, when August Aquila it takes place and who makes the decisions. They are trained from day one on what to expect and when. In smaller firms (three to 10 partners), just the opposite happens. Usually, no one talks about succession until it becomes an issue. Partners are not sure of the process. And, the major offenders are usually the founding partners or those with large books of business.

What Should Small Firms Do? There are several things that small firms should do in order to safeguard the continuation of the firm. Many firms fear competitors, technology or not being able to retain qualified staff, but the major threat to smaller firms is the lack of succession planning.

1. Realize that succession is an emotional event. Partners, especially founding part-

ners, spend their entire professional life acquiring clients, training staff, being part of the community. Succession asks them to step away from all of that.

2. What will I do now? Whether a partner

retires at 66 or 70, they still have a long life ahead of them. If they have not developed outside interest or a plan on how they intend to live the next 20 years, they will feel a lot of fear and even loss. They need to begin to separate themselves from the firm.

3. What might the firm do? You may not 20 I E X T E N D E D S E R V I C E S E D I T I O N 2 017

want to throw out a useful asset. If the partner has valuable connections in the community, can still bring in business or mentor younger associates, then you should find a way to keep him or her.

compensation plan aligned with the partner’s succession plan. If you ask the partner to transfer clients and your compensation plan is based on billable hours, there is misalignment.

4. Start the process early. The biggest mis- 9. Develop a culture of accountability. If take a firm can make is to wait until the year the partner is going to retire. At a minimum lay out a five-year plan which outlines year-by-year what you want the partner to start doing. For example, clients will need to be transferred to others in the firm. This is a multi-year process.

your firm lacks a culture of accountability, then partners know that whatever they do or don’t do, nothing will happen to them. Hence the same will happen when it comes time to start their succession. They think, “Nothing will happen to me if I postpone it for another year or so.”

5. Make sure you have a partner retire- Don’t Let This Happen at Your Firm ment agreement. This should outline Here is an example of what commonly when a partner retires, the required notice (at least two years), what happens if the partner does not transition clients, and so on. Each partner should be responsible for developing his or her successor.

6. It’s the firm and not the partner that makes the decisions. Small firms run into problems when they don’t have a written plan or when they let individual partners decide when or if they will retire. What happens is that each partner negotiates his or her retirement. It’s not that unusual to find partners well into his 70s still working at firms, whether they are productive or not.

7. Make sure you take into consideration your buyouts. Succession planning is not

just about the individual, it also affects the entire firm. Review your current buyout agreement and make sure that it still makes sense for the firm. If not, don’t be afraid to modify it now.

8. Be sure compensation system isn’t a hindrance. It’s critical to have your

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happens when you don’t take the time to address succession and develop a process. Sam is the managing partner of a fivepartner firm. The firm has grown over the years and it is now $4.5 million in revenue. Sam was one of the two founders. The other founder had to retire because of medical reasons. Sam owns 30% of the firm and according to the current buyout; he will receive $1.35 million. Sam is also the highest paid partner. By the way, Sam is 66 years old and has no intention to retire anytime soon. The other partners realize that they cannot afford to pay Sam 100% of his buyout. The firm has no written succession document.

This article is continued on www.CPAmagazine.com. August Aquila is CEO of AQUILA Global Advisors, LLC. He assists firms in the development of succession plans, the design of compensation plans, buying or selling a practice and strategic planning. You can reach him at aaquila@aquilaadvisors.com or 952-930-1295.

Another Surprise From the Oscars BY MARK A. LUSCOMBE, J.D., LL.M, CPA

erhaps an even greater surprise for nominees attending the 89th Annual Academy Awards than finding out who really won the Best Picture Award will Mark A. Luscombe be learning that those Oscar gift bags of swag come with serious tax obligations. The tax law does not view these gift bags as true gifts because the motive of the businesses in providing their products or services is to promote that product or service, not because of a philanthropic motive. If a nominee is in the top federal income tax bracket of 39.6% and receives a gift bag valued at $100,000, the potential federal income tax is $39,600. There could also be additional state income taxes due. And the gift bag does not include cash to pay the taxes, so the taxes will have to be paid from other resources. Of course, just because the gift bag is valued at $100,000 or more does not mean that it is necessarily that valuable to the recipient. In fact, there are steps that a nominee can take to reduce or eliminate the potential tax when there is little interest in the items included. The nominee can refuse to accept the gift bag. By refusing to accept, the gift bag is not received for tax purposes and not subject to tax. However, if a few items catch their eye, they are not likely to be able to pull those from the gift bag and refuse to accept the rest. It is likely to be an all or nothing proposition. The nominee could accept the gift bag and then donate to a charity or sell the items in which they are not interested. However, some items in the gift

bag, such as gift cards or certificates, may be non-transferable. Some items even a charity may refuse to accept. In the case of non-transferable gift certificates, the IRS has stated that they are subject to tax if accepted and redeemed. So, failing to redeem them appears to be sufficient to avoid tax. If the nominee is able to donate some of the items to charities, that may create an offsetting charitable contribution deduction on their tax return. However, it may not be a full offset. Charitable con-

“A very high income could therefore result in the elimination of all but 20% of the charitable contribution deduction. Selling the unwanted items to star-crossed fans could result in even more income subject to tax.” tribution deductions under federal law are generally limited to 50% of adjusted gross income. That might not be too much of a problem for wealthy movie stars. There is also, however, a phase-out of certain itemized deductions, including charitable contribution deductions, for higher income taxpayers. For 2017, those phase-outs start at an adjusted gross income of $261,500 for single taxpayers and $313,800 for joint filers. The phase-out is the lesser of: (1) 3% of the excess of the nominee’s adjusted gross income over these threshold amounts, or

(2) 80% of the allowable itemized deductions subject to the phase-out, including charitable contribution deductions. A very high income could therefore result in the elimination of all but 20% of the charitable contribution deduction. Selling the unwanted items to star-crossed fans could result in even more income subject to tax. Since adjusted gross income is used as a factor in determining the phase-out of many tax breaks, taking the value of the gift bag into income could result in the reduction of other tax breaks to which the nominee may otherwise have been entitled, even if they otherwise qualify for the full charitable contribution deduction. Another possible action that the nominee could take would be, before accepting the gift bag, to review the list of contents and designate in writing certain items to be donated directly to a charity before the gift bag is accepted. While this certainly eliminates the swag surprise element on Oscar night, this advance planning could avoid the need to take the full value of the gift bag into income. There would also be no charitable contribution deduction for those items because the donation would not be viewed as coming from the nominee. Nominees, in addition to discussions with their designer and hair stylist, might also be well advised to have a discussion with their accountant.

CPE

Related CPE Quiz on Page 29

Mark A. Luscombe, JD, LLM, CPA, is the Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting.

Manage, Enhance and Expand Your Practice E X T E N D E D S E R V I C E S E D I T I O N 2 017 I 21

Website Builder Roundtable Service2Client Tenenz ClientWhys Wolters Kluwer Thomson Reuters CPA Site Solutions AccountantsWorld CPASites, LLC Build Your Firm

WHAT YOUR WEBSITE SHOULD BE DOING FOR YOU BY JOSHUA FLUEGEL

CPA’s website is the proverbial greeting handshake for many potential clients. It forms a person’s initial opinion of the firm. This importance has led many to speculate on the best way to con-

struct and maintain a website. CPA Magazine approached thought leaders on the subject to get their views on mistakes CPAs often make when creating what website and what feature every CPA website should have.

DAVE RUTAN CEO of CPA Site Solutions What is a mistake you see tax professionals often make when creating and running their websites? Enticed by the low-cost and easy DIY claims, many tax professionals attempt to build their own website. They soon realize that proper website creation involves much more than inserting contact information and a few pictures. Professionally designed websites should be more than aesthetically pleasing. A well-designed website should be created to convert visitors into clients by incorporating search engine optimization elements, properly placed calls-to-action and engaging, educational content. It’s also critical that tax professionals keep their website updated. Aside from turning off prospective and existing clients, websites that lack fresh content and user-friendly features are penalized by search engines, resulting in poor rankings and ultimately a decline in business.

What is a feature you think every tax professional’s website should have? There are a number of must-have website features that will benefit accountants. The first is engaging, educational content. Not only does the right content inform visitors about the services you offer, but it also helps increase search engine results rankings. And, since the vast majority of Internet searchers don’t go past page one of results, your firm’s ranking is a key factor prospective clients’ ability to find you. Your website should also showcase positive reviews and testimonials to help prospective clients know what it’s like to work with you and your firm. It’s also important to have a secure portal that allows tax professionals to conveniently exchange files with clients via their website. Finally, an updated “Contact Us” page with request forms allows you to gather information directly from your website 24/7.

ROBERT TENNER CEO of Accounting and Financial Site Builder from Tenenz What is a mistake you see tax professionals often make when creating and running their websites? The heart of any website is the content. In order for a website to be successful the content must be relevant, timely, and useful to a firm’s desired audience (whether it’s existing clients or potential leads). Professionals that want to properly leverage their website must put some time into thinking through their content: how they describe their practice and services they provide, what resources they want to provide to clients (such as articles or calculators), and critically, how often they are willing to update and refresh content. This is often more difficult than people guess, but having direct access to modify and update their website’s content is key to help eliminate obstacles on maintaining the most important aspect of their website. Going through a third-party every time you wish to change something is not only a hassle, but eventually is exhausting and results in stale and out-of-date content.

We also see too many firms paying fees for services they don’t need or use. We believe a better solution is providing a web platform that allows the firm to just add and pay for the services and features that work for them, not the website provider. What is a feature you think every tax professional’s website should have? It seems not a month goes by without another big new story relating to a new online security breach. Any tax professional starting to embrace digital tools must realize that email is not a secure channel to send private information. Professionals must offer a secure file-sharing portal for their clients to keep their information safe. Emails travel across many different servers, some of which may or may not encrypt the message as it goes. Just like a postcard, that means prying eyes could see the information as it travels. A secure file transfer portal lets clients and tax professionals securely upload, store, and download sensitive documents at any time.

This article is continued on www.CPAmagazine.com. 22 I S P R I N G 2 017 www.CPAmagazine.com

Tax Research Methodology to Achieve Sustainable Tax Return Filing Positions

BY PETER J. SCALISE

he In order to optimize your CPA Firm’s overall efficiency, effectiveness, and productivity in connection to researching and resolving a tax issue Peter J. Scalise and determining the sustainability of a tax return filing position per Circular 230, the appropriate tax research processes must be meticulously designed, implemented, and executed. The subsequent five practical steps will guide you in establishing an all-inclusive tax research effort on behalf of your entire client base while properly ascertaining the likelihood of success should a tax position taken on a tax return be challenged by the Internal Revenue Service (hereinafter the “Service”) upon examination.

based upon his or her prior knowledge of the tax laws, can normally determine most of the initial pertinent issues in terms of general tax laws. However, after performing an initial search of the authorities to answer the initial issues, a tax professional often discovers that one or more additional specific technical questions of interpretations must be resolved before the initial issues can be fully addressed. Consequently, at this stage, a tax professional may also encounter the need to obtain additional facts from the client. Accordingly, the tax research process may have to move back from step two to step one. In addition, you the tax professional may learn at this stage that facts initially not considered to be important may in fact prove critical to the resolution of all of your client’s tax issues.

Tax Research Methodology

Identify Statutory, Administrative, and Judicial Authority The third step in the

Establish the Facts and Circumstances The

first step in the tax research process is to establish all of the facts and circumstances provided by your client in order to determine which tax laws apply to your client’s fact pattern. At this initial stage, it is imperative not to omit nor overlook any of your client’s facts and circumstances whether appearing material or immaterial. Always be guided by the axiom that facts and circumstances appearing to be immaterial individually may, in fact, be material in the aggregate.

Determine All the Issues The second step

in the tax research process entails determining all of the tax issues affecting your client’s specific facts and circumstances and any and all mitigating factors. Normally, complex tax issues evolve through several stages of development. For instance an experienced tax professional,

tax research process entails identifying the specific authorities to support all of your client’s tax issues while appropriately weighing authorities that may be contrary to your supporting position. Generally, this process begins with consulting statutory authority (e.g., the Internal Revenue Code) and quickly expands to encompass administrative authority (e.g., Proposed Treasury Regulations, Temporary Treasury Regulations, Final Treasury Regulations, Revenue Rulings, Revenue Procedures, Private Letter Rulings, Technical Advice Memorandum, General Counsel Memorandum, Circular 230, Internal Revenue Manual, Internal Revenue Bulletins, IRS Field Service Advice Memorandum, IRS Determination Letters, and IRS Notices, etc.) and judicial authority (e.g., judicial interpretations decided by the U.S. Tax Court, the U.S. District

Court, the U.S. Court of Federal Claims, the U.S. Circuit Court of Appeals, the U.S. Court of Appeals for the Federal Circuit, and the U.S. Supreme Court). In addition, at times, you the tax professional may have to consult the legislative history (e.g., the Public Laws and Congressional Committee Reports from the House of Representatives and the Senate) of a particular Internal Revenue Code section to fully address what Congress’s intent was in passing a particular bill. Lastly, you may also want to consult the voluminous range of editorial interpretations (e.g., Tax Treatises, Tax Journals, etc.) available to assist in the interpretation a particular tax issue. However, it must be duly noted that editorial interpretations are impermissible sources of authority before the Service and the judicial system. For clarification purposes, the subsequent synopsis will elaborate upon the aforementioned statutory, administrative, and judicial interpretations:

Statutory Authority

The Internal Revenue Code All fed-

eral level tax statutes passed by Congress into law are compiled and published in Title 26 of The United States Code. This article is continued on www.

CPAmagazine.com.

CPE

Related CPE Quiz on Page 29

Peter J. Scalise serves as the Federal Tax Credits & Incentives Practice Leader for the Americas at 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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Cloud Accounting Roundtable

OPTIMIZE YOUR USE OF CLOUD ACCOUNTING SOFTWARE BY JOSHUA FLUEGEL

Intuit Trintech AccountingSuite Wolters Kluwer AccountantsWorld Xero Americas

loud accounting software has freed CPAs from many of the constrictions of 20 years ago. A CPA can now work from multiple locations and get more in-depth input from clients in a way that is convenient for them. This is all the more reason why such software should be selected carefully. CPA

Magazine invited industry thought leaders to a roundtable discussion to get their views on recent developments in cloud accounting software, what mistakes and/or opportunities CPAs should be aware and tax professionals should look out for when selecting cloud accounting software?

KURT KUNSELMAN COO of AccountingSuite What is a recent development and/or useful feature in cloud accounting software? Adding collaboration tools such as chat with your accountant or chatting with other users within the cloud service with the ability to create tasks. Cloud accounting is about collaboration. The more tools that are added, such as chat with others in your account, the more efficient we all become and it redefines the purpose of cloud accounting “software” - which is really a service. Chat capabilities that also allow for creating tasks will become industry standard and will also redefine daily workflows within tax, client accounting services and overall company operations. This not only creates the efficiencies with accountants and other users, but, keep in mind, it includes third-party users that are part of your account such as contractors and third-party fulfillment partners.

What is something tax professionals should look out for when selecting cloud accounting software? The ability to export a clean and useful file that groups all information from a cash basis chart of accounts into the correct categories for the schedule that is needed for Sole Prop, C Corp, S Corp, B Corp, and Non Profits. In addition, the tax professional should look for a solution that has built in controls for best practices and allows their clients to scale their business. The old saying “garbage in/garbage out” applies to tax professionals as well. They need to be assured that the cloud accounting software is just not letting clients create bad data. As our technology solutions become more sophisticated, we can automate best processes and prevent users from entering data where it’s not supposed to be in the first place. We are not there yet, but soon in the future we should be as we move to hands-free accounting.

DR. CHANDRA BHANSALI Co-founder and CEO of AccountantsWorld What is a recent development and/or useful feature in cloud accounting software? Automation is key in cloud-based accounting software. The ability to automatically update accounting data with payments made and received is an incredibly useful feature for both accountants and their clients alike. Automation reduces the effort and time it takes to follow-up with clients to receive and aggregate information. It enhances accuracy of data by using the ability to identify similar transactions and to route them to the right account automatically. Therefore, it cuts down a significant amount of time and cost in preparing the books. Such features enable accountants to now serve

24 I E X T E N D E D S E R V I C E S E D I T I O N 2 017 www.CPAmagazine.com

more clients within their existing resources. Obviously, it increases revenue and profitability. What is something tax professionals should look out for when selecting cloud accounting software? Most accountants agree the more their clients are involved in data entry, the more mistakes they’ll be left cleaning up. Cloud-based accounting software that allows accountants to provide limited access to their clients when necessary is the ideal choice. This collaborative cloud-computing model will help reduce the need to comb through multiple platforms to aggregate data, increasing a firm’s efficiency, productivity and profitability.

This article is continued on www.CPAmagazine.com.

√ CHECKLIST: Elder Financial Abuse By Martin M. Shenkman, CPA, MBA, PFS, J.D.

ging clients are growing in number and practitioners should address their needs.

Consider the Six Following Facts:

By 2050 the population aged 65 is projected to be 83.7 million. This represents significant growth, almost double the figure from 2012. The population 85 years and over will double by 2036 and then triple by 2049. The numbers are significant and the impact on CPA practices should be as well.

The 85-and-over United States population, the fastest-growing cohort in the country, is projected to rise from 5.8 million in 2010 to 19 million in 20501. The needs of these very elderly clients will be more pronounced, especially in terms of protection from elder financial abuse.

The biggest health concern is Alzheimer’s, which strikes at a 47 percent rate among the over 85 population2.

Mental illness and cognitive deterioration increase with age. So an aging population will result in an increase of these challenges as well. The average age of an Alzheimer’s diagnosis is 73. Almost half of those over the age of 85 have some cognitive impairment. Chronic illness also increases with age. 90 percent of seniors have at least one chronic disease, and three quarters have two or more chronic diseases. The challenges of chronic illness are broader than merely the cognitive issues associated with aging. Practitioners must recognize that mere physical frailty may make client targets for financial abuse.

The age for peak financial decision making is age 50. Financial decision making ability begins to decline by age

60 and is significantly impacted by age 80. Even more worrisome is the same studies indicated people’s perceptions of their abilities do not decline. At what age are most estate plans crafted? Likely much older3. The fact is that many clients wait too long to create an estate plan that addresses the challenges of aging. This delay exposes these clients to greater risks of elder abuse. Creating estate plans and signing documents at a time when the client is frailer and his or her cognitive abilities more limited may itself be the opening that perpetrators exploit. This growing gap between financial ability, and the aging client’s perception of his or her financial ability, is one of the gaps that perpetrators of elder financial abuse seek to exploit. It is also very telling of why preventing elder financial abuse is so difficult. Those who are vulnerable often perceive themselves as fully capable of making financial decisions. They will often simply not see any frailties to address in further planning. Practitioners that are truly acting in the long term role as “trusted adviser” may be the optimal professional to encourage planning.

Half of all people age 65 and older live alone4. This makes comprehensive planning, not merely the preparation of documents, essential for the protection of these clients. Many of these clients are not only vulnerable as a result of health challenges, but isolated in terms of having few if any family or friends to safely rely on to name in fiduciary capacities. Too often estate planners, and others, assume everyone has appropriate family members to name to serve as an agent under a power of attorney (or successor trustee under a revocable trust). The result is that these clients may be ill served by an estate planning process that presumes family

or other trusted persons to serve in these vital capacities. That too could prove the unraveling of any safety the plan might have afforded. Different steps are needed.

Questions CPAs Should Ask Planning for aging clients requires a different focus than other engagements. CPAs can clarify their role and delineate how they can protect aging clients by asking questions. Consider:

❏ 1.

How can CPAs educate clients about the growing risks of elder financial abuse (identity theft, etc.)? Unless clients, and often their loved ones, are informed of the magnitude of the problems they are unlikely to pursue optimal planning.

❏ 2. What role can CPAs play to minimize the risks of elder financial abuse?

❏ 3. What practical steps can the CPA

recommend to most aging clients to lessen the risks of financial abuse?

❏ 4. a) What roles can or should a

CPA serve in under a client’s financial plan? b) What liability does the practitioner face serving in those capacities? c) W hat liabilities do the firm that the practitioner is affiliated with face? d) Who should earn the fees involved, the practitioner, the firm, or some combination?

❏ 5. What steps can CPAs take to step fully into their role as the “trusted adviser” to protect aging clients?

This article is continued on www.CPAmagazine.com.

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CPA Magazine‘s

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CPA Magazine’s weekly video news broadcast, The Bottom Line, keeps you up to date with news impacting you and your clients: • IRS Updates • Tax Tips • Practice Alerts • Client Acquisition Methods

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CPA Magazine‘s WARNING :

ffers STS. Continued from page 27 Manual Sales Tax Syndrome

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Extended Services Edition 2017 Volume 17, No. 2 Editor T. Steel Rose, CPA, ACG cpa@cpamagazine.com Managing Editor Joshua Fluegel josh@cpamagazine.com Copy Editor Myrna Nelson Advisory Board/Columnists Adam Fayne, J.D. Sidney Kess, CPA, J.D., LL.M Kathleen M. Lach Rick Richardson, CPA, CITP, CGMA Martin M. Shenkman, CPA, MBA, PFS, J.D. Julie Welch, CPA, CFP The opinions given by contributing authors are their own and are not necessarily the opinion of our staff and management. All trademarks used are the property of their respective owner. CPA Magazine (ISSN# 2378-7481) is published four times a year by CPA Magazine, P.O. Box 92342, Southlake, TX 76092, 817-4166650 and 888-610-1144 Standard Mail postage paid at Sussex, WI 53089 ©2017 All Rights Reserved Magazine Publishing Group, Inc. Printed in the U.S.A.

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Instructional Method: Self-study Field of Study: Taxes (3 hours) Program Prerequisites: A basic understanding of tax preparation Recommended CPE Credit: 3 hours CPE Quiz Expiration: June 1, 2018 Quiz Title: Working Children & Long-Term Care

You may earn continuing professional education by studying the articles in CPA Magazine. To be eligible for CPE credit, you should spend approximately three to six hours reading, reviewing and studying the material in the current issue followed by answering the self-study test questions. Certify that you have completed the study requirement for this exam by submitting a signed copy of the test via email (josh@ cpamagazine.com), fax (817-756-7252) or mail (CPA Magazine, P.O. Box 92342, Southlake, TX 76092). A certificate documenting the CPE credits will be issued via email 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. Courses conform to state requirements in these states: AK, AL*, AZ, CA, CO, 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

Answer the following 15 questions and complete the answer sheet on page 31. 1. For federal income tax purposes in 2017, premiums for longterm care insurance are treated as deductible medical expenses up to: A. Over age 40 but not over age 50: $700 B. Over age 50 but not over age 65: $1,500 C. Over age 65 but not over age 70: $4,100 D. Over age 70: $5,110 2. Which of the following is deductible if a taxpayer is living in a nursing home primarily for medical reasons? A. Food B. Medications covered by government assistance C. Lodging D. Both A and C 3. When it is medically determined that the insured needs longterm care, the policy begins to pay off. If the policy pays a per

diem amount without regard to the insured’s needs, what set dollar limit per day is tax-free for 2017? A. $320 B. $360 C. $380 D. $420

4. What is a recommended “treasure trove” of financial planning and practice development opportunities for practitioners? A. A client’s income tax return B. A client’s medical records C. A client’s investment portfolio D. A client’s recent corporate acquisition 5. Where the taxpayer and spouse have chosen to file separately in order to take advantage of one spouse’s large medical deductions and lower AGI, what should a tax planner do to potentially Continued on page 30

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Continued from page 29

turn the clients into planning clients? A. Explore whether necessary home improvements may qualify as a medical expense deduction B. Recommend that the taxpayers meet with their estate planning and review existing, or execute new, durable powers of attorney and health proxies C. Evaluate whether the client has adequate insurance and whether the client is maximizing health savings accounts or other taxfavorable plans to pay deductibles and non-covered costs. D. None of the above

6. Through September 2017, individual taxpayers with an assessed balance of tax, penalty and interest between ________ and _________ may take advantage of accelerated processing of their installment agreement request. A. $10,000 and $25,000 B. $25,000 and $50,000 C. $50,000 and $100,000 D. $100,000 and $175,000 7. Under the test criteria changes to the IRS’ installment agreement program, individual taxpayers who have assessed balances between $50,001 and $100,000 can have a payment period up to: A. 84 months B. 18 months C. 72 months D. 68 months

would not be taxed. C. The potential income tax for the bag would be $39,600 if the star were in the top federal income tax bracket. D. All of the above

10. For 2017, a phase-out of certain itemized deductions, including charitable contribution deductions, start at an adjusted gross income of $261,500 for single taxpayers and _________ for joint filers. A. $264,300 B. $432,000 C. $313,800 D. None of the above 11. In 2017, a child can earn for the year up to the amount of the standard deduction for his or her filing status, which is: A. $5,580 B. $6,350 C. $6,430 D. $7,860 12. If a child opts to maximize a traditional IRA, then the child may have earnings up to: A. $11,850 B. $5,500 C. $11,000 D. $6,350

8. The new fee to enter into a regular direct debit installment agreement with the IRS to pay outstanding tax liabilities is: A. $89 B. $225 C. $149 D. $107

13. What is the parent’s dependency exemption for a child that works and earns money in 2017? A. 2800 B. 3,540 C. 4,050 D. 4,650

9. A movie star wins an Oscar for best picture and receives a gift bag valued at $100,000. Which of the following statements regarding the gift’s tax implications are true? A. The star could donate various items to charity to ease the tax burden. B. If the star were to accept gift cards but not redeem them, they

14. In tax research, one must identify specific authorities to support a client’s tax issues. Which of the following is a judicial authority? A. Interpretations decided by the U.S. Court of Federal Claims B. Temporary Treasury Regulations C. Public Laws and Congressional Committee Reports from the House of Representatives and the Senate D. All of the above are a judicial authority

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15. I n tax research, one must identify specific authorities to support a client’s tax issues. Which of the following is an administrative authority? A. U.S. Circuit Court of Appeals B. Private Letter Rulings C. U.S. Tax Court D. All of the above are an administrative authority

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Total due: $25 for 3 hours of CPE credit. Submit: Certify that you have completed the study requirement for this exam by submitting a signed copy of the test via email (josh@cpamagazine.com), fax (817-756-7252) or mail (CPA Magazine, P.O. Box 92342, Southlake, TX 76092). Payment: Include credit card info on form or mail check with the quiz. Name

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