Today's CPA Jan/Feb 2018 by The Warren Group

Todayâ&#x20AC;&#x2122;sCPA JAN/FEB 2018

TE X AS SOCIETY OF

C E RT I F I E D P U B L I C AC C O U N TA N T S

The Texas Economy: Looking Ahead

Special Feature:

New Tax Cuts and Jobs Act

Reorganization of PCAOB Auditing Standards Due Diligence Requirements for Tax Return Preparers, Part 1 Developing Trends in the Tax Accounting Profession and Alternative Career Options for Accountants

Also: Tax Traps of Inherited IRAs

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CHAIRMAN Jim Oliver, CPA, CGMA

EXECUTIVE DIRECTOR/CEO Jodi Ann Ray, CCE, IOM

EDITORIAL BOARD CHAIRMAN James Danford, CPA

Staff MANAGING EDITOR DeLynn Deakins ddeakins@tscpa.net 972-687-8550 800-428-0272, ext. 250

TECHNICAL EDITOR Brinn Serbanic, CPA, CFP® technicaleditor@tscpa.net

CONTENTS VOLUME 45, NUMBER 4 JANUARY/FEBRUARY 2018

cover story 28 The Texas Economy: Looking Ahead society features 14 Spotlight on CPAs What is ‘Most Fun Ever?’ 19 Capitol Interest In the Interim technical articles

COLUMN EDITORS

20 Reorganization of PCAOB Auditing Standards

Jason B. Freeman, CPA, JD Mano Mahadeva, CPA, MBA C. William (Bill) Thomas, CPA, Ph.D.

24 Due Diligence Requirements for Tax Return Preparers, Part 1

WEB EDITOR Wayne Hardin whardin@tscpa.net

CONTRIBUTORS Melinda Bentley, CAE; Rosa Castillo; Anne Davis, ABC; Chrissy Jones, AICPA; Rhonda Ledbetter; Craig Nauta; Kim Newlin; Catherine Raffetto; Rori Shaw; Patty Wyatt

DIRECTOR, MARKETING AND COMMUNICATIONS Melinda Bentley, CAE

CLASSIFIED DeLynn Deakins Texas Society of CPAs 14651 Dallas Parkway, Suite 700 Dallas, Texas 75254-7408 972-687-8550 ddeakins@tscpa.net.

Editorial Board Arthur Agulnek, CPA-Dallas; Aaron Borden, CPA-Dallas; James Danford, CPA-Fort Worth; Melissa Frazier, CPA-Houston; Jason Freeman, CPADallas; Baria Jaroudi, CPA-Houston; Brian Johnson, CPA-Fort Worth; Tony Katz, CPA-Dallas; Joseph Krupka, CPA-Dallas; Randy Lokey, CPA-Dallas; Mano Mahadeva, CPA-Dallas; Alyssa Martin, CPA-Dallas; Stephanie Morgan, CPA-East Texas; Marshall Pitman, CPA-San Antonio; Kamala Raghavan, CPA-Houston; Houston Runyan, CPA-Fort Worth; Barbara Scofield, CPA-Permian Basin; C. William Thomas, CPA-Central Texas

Design/Production/Advertising The Warren Group thewarrengroup.com custompubs@thewarrengroup.com

32 Developing Trends in the Tax Accounting Profession and Alternative Career Options for Accountants 36 Tax Traps of Inherited IRAs columns 4 Chairman’s Message A Time for Celebration and Commitment 6

Tax Topics Bitcoin, Blockchain and the Revolution to Come

9 Accounting & Auditing The Changing Face of Our Talent Pool 10 Special Feature A Word on Tax Reform – the Tax Cuts and Jobs Act 12 Chapters Fall Softball: A Fort Worth CPA Phenomenon 16 Business Perspectives Merger Mania departments 17 Take Note 41 TSCPA CPE Course Calendar 42 Classifieds

© 2018, Texas Society of CPAs. The opinions expressed herein are those of the authors and are not necessarily those of the Texas Society of CPAs. Today’s CPA (ISSN 00889-4337) is published bimonthly by the Texas Society of Certified Public Accountants; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408. Member subscription rate is $3 per year (included in membership dues); nonmember subscription rate is $28 per year. Single issue rate is $5. Periodical POSTAGE PAID at Dallas, TX and additional mailing offices. POSTMASTER: Send address changes to: Today’s CPA; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408.

CHAIRMAN’S MESSAGE

A Time for Celebration and Commitment

By Jim Oliver, CPA, CGMA, 2017-2018 TSCPA Chairman

s I prepared to write this column, I originally intended to discuss tax season and TSCPA’s role in supporting practitioners through our CPE courses, website resources and connections, and the various tax committees’ advocacy work on our behalf – all great work and worthy of a column. One Saturday morning in December totally altered my direction. One of the most rewarding privileges afforded the TSCPA chairman occurs when the Texas State Board offers an invitation to the swearing-in ceremony in Austin for newly licensed CPAs. That invitation, more importantly, comes with the best seat in the house, right on stage with an up-close view of each CPA walking across that platform to receive their life-changing certificate. That bird’s eye perspective also includes those family and friends in the audience to enjoy and celebrate the moment. Of the hundreds of recipients, most accept their certificate and congratulations from one of the State Board members. Others receive theirs instead from a CPA family member (or two) – spouse, parent, sibling, grandparent or combinations thereof – along with big hugs. Invariably, by the time each new CPA reaches a point several steps from that handoff, bright shining eyes and an overwhelming smile reveal the incredible joy, hope and confidence inside, reflecting the realization of the significance of the steps taken. From my perch, I am absorbed in all those different faces sharing almost identical emotions. Family and friends exult in the announcement of each name, most with polite applause, but some with elated exuberance, recognizing the incredible importance not only of the moment, but also of the individual accomplishment. The youngest new CPA was 24, the oldest in their 70s. The group’s diversity extends well beyond mere age to ethnic, racial, socioeconomic and geographic differences and to their individual professional pursuits and career levels. Yet they share common character traits that put them there – knowledge, self-discipline and perseverance – all of which should serve them well in both professional and personal life. Even in our diversity, CPAs also remain strongly united by the shared values embodied in our profession and our certificates. In swearing to uphold the Code of Professional Conduct, each new CPA commits to follow those high standards and values by which we all should live our lives. They value the CPA certificate both for the work it took to earn it and for the bright future it offers in the workplace. One day, they will value it even more because of the ongoing commitment required to live out those high standards and 4

values each day. These new CPAs are the future of our profession, and each of us should commit to encourage, engage and empower them at work and in our communities.

EVEN IN OUR DIVERSITY, CPAS ALSO REMAIN STRONGLY UNITED BY THE SHARED VALUES EMBODIED IN OUR PROFESSION AND OUR CERTIFICATES.

In addition to new CPAs, we also honored another select group that morning – those CPAs licensed in Texas for 50 years. Many are still actively working and carrying out their calling. Their committed legacy of service reminds us of our honorable profession’s long history and the long professional journey many of those new CPAs have ahead. At the end of the ceremony, most of the new CPAs swarm one of the oversized State Board official seals set up for a photo opportunity to include their new certificate and those who supported them on their journey. Others head for the chapter exhibits to find out more about what TSCPA offers (or to pick up cookies or a gift). Eventually, the event center clears as the new CPAs finally head out for celebratory lunches, long drives home or, perhaps, to their neighborhood frame shop to make sure that certificate is both protected and ready to display to the world. I drive back to San Antonio still contemplating and basking in the excitement of that morning’s celebration and the reminder of how important our CPA certificate is. This world needs committed professionals like us – self-disciplined, competent, driven by integrity, objectivity and independence, steadfast in speaking the truth with grace, and trusted for our ability to analyze and advise – not out of self-interest, but from a conviction to serve others. As Rick Warren once observed, “Nothing shapes your life more than the commitments you choose to make.” n

Jim Oliver, CPA, CGMA

is a partner with Houston-based CPA firm Calvetti Ferguson and resides in San Antonio. He can be contacted at joliver@calvettiferguson.com.

Today’sCPA

WHAT CAN YOU EXPECT

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TAX TOPICS

Bitcoin, Blockchain and the Revolution to Come

By Jason B. Freeman, JD, CPA | Column Editor

e are in the midst of a revolution – a digital transformation driven by what many believe could be the most powerful decentralizing force since the rise of the internet: Blockchain. It is difficult to overstate the potential impact of this technology and its applications. Much as the double-entry system of accounting – first codified by Luca Pacioli, the “father of accounting” – laid the groundwork for the rise of capitalism and, it has been argued, even modern nation-states, blockchain carries the capacity to create a “world-wide ledger” that could record the exchange and providence of virtually everything of value. It promises to allow farflung parties to engage in e-commerce without the necessity of a financial intermediary and to usher in an era of true globalization. In a nutshell, blockchain provides the infrastructure to replace the middleman – in nearly any area of application – with a decentralized web of users. In that respect, it is a democratizing force. It is, as The Economist once dubbed it, a “Trust Machine,” allowing “people who have no particular confidence in each other [to] collaborate without having to go through a neutral central 6

authority [known as a ‘trusted intermediary’]” to validate and record their transaction. The regulatory implications for such a shift could be profound. Blockchain is, however, not without its detractors. Some have noted the seemingly irrational hype behind the technology. They have questioned its true value, casting it as a solution in search of a problem. As they see it, blockchain is an answer to a problem that none of us realized we even had: that of the trusted intermediary. But of course, many saw no need for the internet back in 1993 either. One can hardly discuss blockchain without reference to its first and most famous application: Bitcoin. Bitcoin is built on an underlying blockchain structure. In fact, bitcoin, the world’s largest cryptocurrency by market capitalization, is itself a more popular, well-recognized phenomenon than blockchain. Its meteoric rise in the closing months of 2017 – as the price of bitcoin rose over 1,600 percent to nearly $20,000 then fell, then rose again– was an absolutely remarkable feat that demonstrates both the promise and the risks inherent in the technology. Today’sCPA

It is nothing short of remarkable that in the mere nine years since Satoshi Nakamoto, the shadowy and likely pseudonymous founder of bitcoin, first released the bitcoin “Genesis Block,” a respectable number of people have (right or wrong) come to view bitcoin as a viable alternative to fiat currency. Through the blockchain platform, bitcoin solved decades-old theoretical conundrums, such as the double-spending problem and the curiously named Byzantine Generals Problem, creating for the first time a viable digital currency and, in the process, shining a light on the potential of blockchain. With markets and financial institutions taking notice, it should come as no surprise that regulators are increasingly focused on the impact of bitcoin and blockchain technology, as well.

Blockchain: What is It? Fundamentally, a blockchain is a type of database – a chronological ledger of transactions recorded by a network of computers. A copy of the blockchain is saved on each computer in the network, so there is no need for a centralized administrator. The system is “decentralized” and therefore often referred to as a shared, distributed digital ledger. A blockchain structure does not require a “trusted” third party to serve as an intermediary or clearinghouse in order to validate a transaction. This is a key aspect of its popularity. In our modern economy, banks typically play the role of trusted intermediary with respect to non-cash electronic transactions. Banks validate transactions and keep a centralized ledger that parties rely upon to ensure a proper accounting and to guard against double spending of currency, a problem that could otherwise give rise to runaway inflation. Blockchain, however, provides a mechanism that allows two parties that do not know or trust each other to directly engage in a transaction (i.e., on a peer-to-peer basis) without the need for a bank. It is, therefore, referred to as a “trustless” system. Blockchain accomplishes this through the power of a distributed network. Each computer, or “node,” on the network has the ability to send and verify transactions on the blockchain. Virtually any computer with an internet connection can become a node (on a public blockchain, at least). A blockchain operates through a protocol, which is a set of rules that determine when the network nodes will be deemed to have reached a “consensus” that a transaction should be recognized as valid and recorded on the blockchain. For instance, bitcoin’s protocol provides for a proofof-work system, known as “mining,” that essentially recognizes a block when more than half of the computing power on the network agrees that it is valid and satisfies the consensus protocol. Once there is consensus that a set of transactions should be recognized, a block of information recording the transactions is appended onto prior blocks, extending the “blockchain.” Notably, blocks of information cannot be deleted from the blockchain, only added; it is an “append-only” system, which is one of the key security features of a blockchain. Bitcoin Bitcoin – the most well-known application of blockchain technology – was first introduced in 2009 against the backdrop Today’sCPA January/February 2018

THE MINING PROCESS IS EXCEEDINGLY HARD TO PERFORM, BUT RELATIVELY EASY TO VERIFY.

of a global financial crisis that many consider to have been the worst since the Great Depression. The subprime mortgage crash that sparked the economic crisis led to a backlash against financial intermediaries and a push for alternatives to traditional banking and financial systems. Bitcoin promised a mechanism that did not require a traditional “trusted” intermediary to conduct electronic transactions. Its timing on the scene could not have been better. Bitcoins are “created” by miners, nodes on the network that engage in a rigorous process to produce a “proof of work” that, once accepted, results in the release of a predetermined amount of bitcoin to the miner as an incentive to perform the computational process necessary to create the proof of work. The mining process is technical and complicated. It involves the application of complex mathematical computations and cryptographic hash functions to produce “hashes,” a seemingly random alphanumeric strand, to ensure the validity of the blockchain. The mining process is exceedingly hard to perform, but relatively easy to verify. It can essentially only be performed through trial and error, which means that it requires a large amount of computational power. The bitcoin system periodically adjusts the level of difficulty to successfully perform the “mining” function, thereby regulating the supply of bitcoin. Designed to mimic the supply of valuable commodities like gold, the system is capped at 21 million bitcoin and the last bitcoin is estimated to be released in 2140. Despite its current popularity, bitcoin has had to overcome a sordid past. The relative anonymity that it offers made it the medium of choice on the infamous Silk Road website, a black market site founded by the self-styled Dread Private Roberts that utilized the TOR network (a secure and virtually anonymous browser originally developed by the Navy) and facilitated everything from the illicit sale of drugs to murderfor-hire. continued on next page 7

TAX TOPICS continued from previous page Bitcoin’s reputation was also tainted by the Mt. Gox scandal, when the world’s largest bitcoin exchange was hacked and hundreds of millions of dollars in bitcoin were stolen. And, of course, there are stories of small bitcoin fortunes evaporating overnight with lost passwords and compromised hard drives. Nonetheless, the technology has overcome this past and is now vying for mainstream acceptance.

Future Uses and Issues Blockchain’s potential uses are numerous. Bitcoin’s popularity has demonstrated that blockchain is a viable, if not revolutionary, platform for economic transactions, banking, payment processing and investing. But that is just the beginning. A blockchain-based platform could, for example, provide the infrastructure for a real estate recording system, allowing the recording, tracking and transfer of deeds, and providing the ability to perform title searches more efficiently. Just this past year, the first bitcoin-based home purchase closed in Texas. A blockchain platform may particularly lend itself to intellectual property rights, as many have recognized that it would allow for an IP registry that could track and catalogue rights and provide an accessible database for owners, licensees and users. Blockchain also holds promise for the energy sector, as a number of startups have begun using blockchain technology to create peerto-peer markets for the purchase and sale of energy. Blockchain could provide the health care sector, as well, with an alternative way to manage patient medical data that is less susceptible to privacy breaches. Blockchain code could even allow for e-voting, calling to mind a scenario where voters one day cast their vote for president from their smartphones or home computers. It could also perform the essential functions of a notary, timestamping and validating data and transactions through its decentralized network. The possibilities, it seems, may only be limited by creativity and ingenuity. Regulation The bitcoin and blockchain regulatory landscape remains an evolving one. There is no central regulator of the technology; instead, a regulatory patchwork has emerged at both the state and federal level, and regulators do not necessarily classify the technology consistently. For example, for tax purposes, the IRS currently treats bitcoin as property rather than currency. Thus, taxpayers are taxed on the receipt of bitcoin and recognize a gain or loss on its sale. The IRS has shown increasing interest in the taxation of virtual currency transactions, recently prevailing on a year-long effort to enforce a summons on Coinbase, a virtual currency exchange, requiring it to produce customer data on thousands of bitcoin account holders. According to IRS court filings, during 2015, a mere 800 to 900 taxpayers reported gains related to bitcoin. The IRS is seeking to crack down on unreported bitcoin transactions.

Jason B. Freeman, JD, CPA

The Financial Crimes Enforcement Network (FinCEN), a sister bureau of the Department of the Treasury, also polices bitcoin and other cryptocurrencies. Currently, those who fall under FinCEN’s definition of “exchangers” and “administrators” of cryptocurrency are treated as “money service businesses” subject to a regulatory regime under the Bank Secrecy Act that governs currency reporting and anti-money laundering. States such as New York, through its so-called BitLicense, have also adopted their own comprehensive regulatory regimes that cover similar ground. Texas, for its part, has taken a more laissez faire approach, although certain virtual currency activities may fall under a regulatory regime that is overseen by the Texas Department of Banking. The Securities and Exchange Commission (SEC) has become increasingly active in the bitcoin realm. The SEC has selectively brought enforcement actions against cryptocurrency-related investment schemes. In recent months, the SEC has taken particular steps to crack down on several attempts to raise money through Initial Coin Offerings (ICOs), a fundraising mechanism that generally consists of an offering of a new cryptocurrency or virtual token in exchange for bitcoin or other virtual currencies. The SEC has determined that such token investment opportunities may constitute an “investment contract” and, therefore, a “security” under the federal securities laws. The Commodity Futures Trading Commission (CFTC) has also played a role in developing the regulatory landscape. The CFTC has taken the position that virtual currencies are commodities for purposes of the Commodity Exchange Act (CEA), thus falling within its regulatory purview, as well. The CFTC has rather actively sought to enforce the CEA when it comes to bitcoin derivatives and exchanges, and along with the IRS, FinCEN and the SEC, has played a key role in regulatory development. Its announcement in December 2017 that it would allow bitcoin futures exchange trading set off a steady climb in the price of bitcoin, demonstrating the impact that government regulations can have on the market.

A Disruptive Force The blockchain may yet prove to be the most revolutionary technology since the internet. It has certainly shown the potential to be a disruptive force in a number of industries and to reshape social and economic patterns. However, some have noted that the hype may overshadow reality and that blockchain seems to be an answer to a problem that none of us realized we even had. Admittedly, there is more than a kernel of truth behind such sentiments. But it is just as true that many saw no need for the internet back in 1993. And just because we do not fully understand something or its implications does not mean it will not affect us. Accountants, attorneys and businesspeople alike should not be lulled into a sense of complacency that blockchain is a phenomenon merely for the future. Indeed, the future has already happened. n

is the managing member of Freeman Law PLLC, based in the DFW Metroplex, and an adjunct professor of law at Southern Methodist University’s Dedman School of Law. He can be reached at Jason@freemanlaw-pllc.com.

Today’sCPA

ACCOUNTING & AUDITING

The Changing Face of Our Talent Pool

By C. William (Bill) Thomas, CPA, Ph.D.

n past issues of Today’s CPA, this column has focused on changes that are predicted to occur in the accounting profession over the next several years. As databases become more voluminous and more accessible, and as technology to access and analyze that data becomes more sophisticated, the everyday job of the CPA of the future has the potential to change drastically. This has profound implications for the potential talent pool from which public firms, as well as industry, will draw its future accounting professionals. Recent AICPA studies of the supply and demand for accounting graduates and CPA candidates reflect that accounting enrollments are at or near all-time highs and that accounting professionals continue to be in high demand by both industry and the public accounting sector. University enrollments for undergraduate and graduate accounting majors are at or near all-time highs. However, statistics show that the growth rate in the number of new accounting graduates who choose to sit for the CPA Examination is not keeping pace with the overall growth rate in the number of graduates. This represents a potential threat to the accounting profession as a whole, but it is particularly threatening to the auditing profession. Auditing is the only real franchise of the CPA profession. It is the only professional service that only CPAs are licensed to perform. To continue to thrive, auditing firms must not only keep pace with technological change, but strive to develop new ways to leverage technology to serve clients and convince them of the value of the audit function. At the same time, auditing services themselves are becoming ever more complex. Auditors of the future will be required to possess analytical skills that exceed those of our pool of current graduates. The larger and more progressive firms are now beginning to hire data analytics professionals from outside the accounting profession (those trained in the sciences, technology, engineering and math, or “STEM” professions). However, staff accountants of the future will be expected to converse with the more highly trained data analytics professionals and to possess a sufficient set of these skills to be knowledgeable and increasingly proficient in them, as well. How will the changing world of technology, data analytics and “big data” impact the ongoing training of entry-level future accountants? Most experts are predicting that the impact will be significant. The accounting profession clearly needs to attract new entry-level talent that possesses more than just the traditional accounting and auditing skills of today. The auditing tools of the future will enable auditors to examine entire populations of data and analyze those data at a far greater depth of detail, identifying outlier items for further analysis and elevating professionals from the level of data gatherers to the level

C. William Thomas, CPA, Ph.D.

Today’sCPA January/February 2018

THE EVERYDAY JOB OF THE CPA OF THE FUTURE HAS THE POTENTIAL TO CHANGE DRASTICALLY.

of data analyzers. CPAs of the future will be enabled to shift their focus from the mundane and repetitive mechanical tasks traditionally associated with accounting to more judgment and decision-making tasks that require employment of higher order critical thinking skills. All of the Big 4 CPA firms are now helping colleges and universities across the country to add data analytics courses to their curriculum. KPMG, for example, started new degree programs in data analytics at two major universities in 2017 and has plans to add many other schools to this program in the years to come. Other firms have developed extensive training programs in data analytics to both faculty and students. The audit of the future is expected to evolve from a “necessary evil” to much more of a “value added” service. In addition to traditional accounting and auditing skills, there will be a demand for creative people who possess skills in: • business strategy, • risk management, • forensics and • information technology. To retain people with this quality and breadth of experience and talent, continuing professional education training programs will need to be adapted to incorporate more stimulating experienced-based learning using continuous-improvement models of development. CPA firms will need to emphasize innovation and value-added strategies with their clients to change the way the audit is viewed. Successful CPA firms and corporate employers are going to be required to reshape their processes to be more nimble, flexible and innovative in the ways data are handled, retrieved and analyzed. In addition, corporate and firm cultures will have to be reshaped to welcome, rather than resist, change, continuously learning more ways to utilize and leverage data to their advantage. In the face of change, we can lead, follow or get out of the way. Accounting as a profession has a long history of trust and integrity. CPAs of the future will take the lead as business embarks on the world of data analytics. n

is the J.E. Bush professor of accounting in the Hankamer School of Business at Baylor University in Waco. Thomas can be reached at Bill_Thomas@baylor.edu. 9

SPECIAL FEATURE

A Word on Tax Reform – the Tax Cuts and Jobs Act

By Today’s CPA Technical Editor Brinn Serbanic, CPA, CFP®

n Dec. 22, 2017, President Donald Trump signed into law the sweeping changes contained in the Tax Cuts and Jobs Act. Touted as the first major overhaul to the tax system since 1986, the bill includes rate reductions for individuals and corporations, a new deduction for pass-through entities, repeal of the individual health insurance mandate beginning 2019 and doubling of the estate tax exemption to $11.2 million per taxpayer. Today’s CPA magazine is committed to presenting timely, useful analysis of the new tax law for our readership. Each issue of the magazine in 2018 will have an article dedicated to exploring, in depth, a particular topic of the Tax Cuts and Jobs Act: individuals, pass-through entities, corporations, international, and trusts and estates. We would like to begin the series in this issue with a brief summary of the key aspects of the bill that should be considered in calculating 2018 individual or corporate tax estimates this spring.

Business Taxpayers Effective Jan. 1, 2018, the corporate income tax rate is permanently reduced to a flat 21 percent and the corporate alternative minimum tax (AMT) is repealed. New IRC Section 199A will permit owners of sole proprietorships and pass-through entities (other than specified service businesses) to receive a deduction of 20 percent of qualified business income (QBI), subject to limitation, through Dec. 31, 2025. The computation and limitations are complex; but, in short, QBI is defined as all domestic business income other than investment income, such as capital gains, dividends and interest income. The limitation is calculated as the greater of 50 percent of the business’ W-2 wages or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis of tangible, depreciable property. In addition, both bonus and Section 179 expensing of capital assets were expanded – with bonus allowing 100 percent expensing of qualified property placed in service beginning Sept. 27, 2017. The Section 179 limitation was increased to $1 million with phase-out beginning at $2.5 million of assets placed in service. Net operating losses are limited to 80 percent of taxable income for tax years beginning after 2017 and only carryforward, not carryback, is permitted. Also, the domestic production activities deduction was repealed; therefore, this deduction should be removed from the calculation of tax estimates for 2018. Individual Taxpayers The number of tax brackets for individual taxpayers remains at seven, but the rates are reduced and the thresholds are increased. Brinn Serbanic, CPA, CFP®

EACH ISSUE OF TODAY’S CPA MAGAZINE IN 2018 WILL HAVE AN ARTICLE DEDICATED TO EXPLORING, IN DEPTH, A PARTICULAR TOPIC OF THE TAX CUTS AND JOBS ACT. The reduction is temporary, expiring after Dec. 31, 2025. The new maximum rate is 37 percent, not including the 3.8 percent net investment income tax on unearned income, which was retained in the bill. The highest capital gain rate of 20 percent remains unchanged. After 2018, the individual shared responsibility payment for taxpayers without qualifying health insurance coverage will be reduced to zero, effectively repealing the mandate. Further, the standard deduction will be nearly doubled for each filing status, and personal exemptions and miscellaneous itemized deductions will be repealed. A major change for itemized deductions is the imposition of a $10,000 cap for the aggregate of state and local property tax, sales tax and income tax. The medical expense deduction has been retained, and for 2017 and 2018, expenses are deductible to the extent that they exceed 7.5 percent of adjusted gross income, with the threshold increasing to 10 percent in 2019. The alternative minimum tax (AMT) for individuals was retained in the bill; however, the exemption and phase-out thresholds were increased significantly, resulting in AMT impacting fewer taxpayers. A noteworthy change to the tax treatment of alimony for divorce decrees signed after Dec. 31, 2018, is that alimony will no longer be taxable income to the recipient nor deductible by the payor.

Closing Remarks Far from simplifying the tax code, the new law creates more opportunities and greater need for CPAs than ever before. The Editorial Board of Today’s CPA invites you to stay abreast of the impending changes by exploring more detailed coverage of the legislation in each of the magazine’s bi-monthly issues during 2018. n

is technical editor for Today’s CPA magazine. Contact her at technicaleditor@tscpa.net.

Today’sCPA

TSCPA is Your Resource on the Tax Cuts and Jobs Act With the passage of historic tax reform, your clients and employers are looking to you for answers. You can turn to TSCPA for the resources you need to understand the details of the new law. We’ve created a special Tax Reform page on the website, where we’re adding learning opportunities, resources and news updates as they become available. Go to the page at tscpa.org for information on how the tax-law changes affect individuals and businesses. Members are also actively collaborating and discussing important tax-reform issues in our new online members-only community: TSCPA Exchange. Visit this new community at exchange. tscpa.org to join the conversation and learn more from each other.

Tax Season Cessation Program Experiencing: Stress? - Lack of Sleep? IRS induced Nausea?

Tax Reform CPE Programs Continuing professional education programs are scheduled across Texas. The following learning opportunities are lined up. Visit TSCPA’s website to learn more and register, and watch your TSCPA e-communications for other scheduled programs. In addition to live programs, various web offerings are available right at your fingertips. Check our online CPE catalog at tscpa.org for the course that best fits your schedule. Understanding the Tax Cuts and Job Act Amarillo on Feb. 2 (a.m.) El Paso on Feb. 5 (a.m.) Lubbock on Feb. 9 (a.m.) Corpus Christi on Feb. 12 (a.m.) Midland on Feb. 16 (a.m.) Tax Reform’s Impact on International Business Addison on Feb. 1 (p.m.) Fort Worth on Feb. 2 (p.m.) Austin on Feb. 5 (p.m.) San Antonio on Feb. 5 (p.m.) Tax Reform’s Impact on Corporations and Pass-Through Entities Addison on Feb. 1 (a.m.) Fort Worth on Feb. 2 (a.m.) Austin on Feb. 5 (a.m.) San Antonio on Feb. 6 (a.m.)

Today’sCPA January/February 2018

We have helped thousands sell... and WE CAN HELP YOU!

Holmes Group Ryan Pannell Ryan@APS.net 800-397-0249 www.APS.net Delivering Results - One Practice At a time 11

CHAPTERS

Fall Softball: A Fort Worth CPA Phenomenon

By Guest Columnist Kathy R. Kelly | Executive Director, TSCPA’s Fort Worth Chapter

PAs with bats, balls, gloves and cleats – it’s the Fort Worth CPA Softball Tournament! The chapter’s young professionals group organized the first tournament in 2004 and it’s been held annually ever since. A coed, daylong, professionally officiated event, the tournament has grown from 12 teams to 20. The tournament is held at Randol Mill Park, Arlington, in a four-field complex fitted out with picnic tables, Wi-Fi, lots of ice and a gourmet hot dog food truck. Since inception, the chapter estimates 3,500 CPAs, employees, friends and relations have played in the tournament. Some years, teams from corporate employers dominate – like the year Merrill Lynch fielded a team that included a former Chicago White Sox player. Some years, public accounting firms control the wins, as on Oct. 21, 2017, when public firms – Dixon Hughes Goodman LLP, Weaver and CliftonLarsonAllen won three of the four top spots in two divisions. A team from Austin, the Weirdos, grew in prominence over several years, easily spotted on the field in their neon tie-dye jerseys. Always, the action is lively, the food fast and the comradery warm. The tournament reflects the Fort Worth Chapter’s focus on providing in-person networking events throughout the professional community. Aaron Grisz, a Weaver manager, has chaired the tournament for the last few years. In 2015, he and a colleague brought online bracket management and score calculation to the tournament. This innovation earned him a chairman of the year award, because it enabled captains and players to monitor progress on their smart phones and tablets, so games started on time and teams could relax and enjoy the food and beverage provided. Student teams joined the mix in recent years, with teams such as Texas Wesleyan’s Veni Vidi Duci team, I came, I saw, I calculated, putting up fierce defense against far more experienced groups, such as Range Resources’ accounting department team, the Petroleum Jellies. And cross-town rivalries abound, among student teams and otherwise, with Whitley Penn taking on Weaver, Rylander Clay & Opitz challenging CliftonLarsonAllen and PwC meeting KPMG. The benefits to the many firms and companies that participate? Chairman Grisz says: “For Weaver, the softball tournament is a bonding experience filled with competitive fun that carries back to the workplace for better communication and collaboration. It’s always a great time seeing fellow members of the chapter, as well as hanging out with coworkers we may not see often.” That view is shared by other firms; according to 2017 team captain Madeline Henderson, “EY participates in the softball tournament because we strive to grow our professional networks and foster relationships within our own people and the tournament provides a fun, casual avenue to do so! We look forward to it each year!” The 15th annual tournament will be held Saturday, Oct. 27, 2018, at Randol Mill Park, Arlington. Fort Worth CPAs will welcome 20 teams to the field that day. Contact the chapter office for more information. Editor’s Note: A special thanks to Kathy Kelly for authoring this Chapters column. n 12

Weaver took first place in the recreational division, 2017.

The EY team enjoying a big score run up.

Dixon Hughes Goodman took first place in the competitive division, 2017.

Who’s participated in the tournament? Over the years, colorful team names have been a hallmark of the games. They include: • • • • • • • • • • • •

Austin CPA Weirdos BDO Accounts Playable BKD Kicking Ass-ets and Taking Names EY Grand Slamoritization Grant Thornton Victorious Secret HCVT Scared Hitless PwC LIFO the Party Snow Garrett Williams Born to Excel Sutton Frost Cary Accounts Playable Travis Wolff Bad Assets UNT WMDs (Weapons of Mass Depreciation) UT Dallas PPA Bad News Bank Recs

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INTRODUCING THE CGMA PROGRAM. DISCOVER A LIFELONG PROFESSIONAL LEARNING JOURNEY AT CGMA.org/Program ®

CGMA, CHARTERED GLOBAL MANAGEMENT ACCOUNTANT, and the CGMA logo are trademarks of the Association of International Certified Professional Accountants. These trademarks are registered in the United States and in other countries. 18652-326 Today’sCPA January/February 2018

SPOTLIGHT ON CPAS

What is ‘Most Fun Ever?’ Dallas CPA gets her shot on “Jeopardy!”

By Anne McDonald Davis

eborah Beams, CPA-Dallas, had long dreamed of being a contestant on “Jeopardy!.” So she called up the game show honchos and they responded, “Sure, great! Any time!” Wait, no. That’s not how it works. Each year, around 80,000 people take Jeopardy Productions’ online tests trying to score high enough to be chosen for an audition. Out of the few thousand who make the cut, only a few hundred will actually ever appear on the show. Beams ponders: “Whatever the magic formula, I made it. It took me five tries, four online tests, three auditions and 13 years … but I made it.” She adds, laughing, “I don’t know if they took me this time because I admitted it was my fifth try.” After Beams’ audition in October 2016, she knew that it could take up to 18 months to learn her fate; she heard from “Jeopardy!” in two. Her taping was slated for sometime in January 2017. “My busiest time of year,” she rues. “Luckily, we hadn’t gotten too busy when the specific day for me was set. I told my co-workers, ‘When “Jeopardy!” calls, you have to go!’” So off Beams went to have an experience she describes as “awesome,” then returned to her supportive colleagues to share every exciting detail. Wait, no. That’s not how it works. When someone competes on the show, they are not allowed to tell anyone what happened for months. Only after their episode airs may they discuss the outcome and details. Beams remarks mischievously: “It was actually kind of fun to have a secret. Now my family had seen the taping, so they knew. But they had to keep quiet too!” Aside from having a bright mind, a broad base of knowledge, a cool head and the neuromuscular synapses necessary to slap a buzzer really fast, “Jeopardy!” contenders rely on a certain amount of good fortune. Since her appearance was scheduled to air around Easter, Beams was hoping for categories that played well with the holiday. No such luck. She sighs: “I got ‘Female Lead Singers’ and ‘Marvel Comics.’ It didn’t help that one of my opponents was a total comic book geek.” Still, Beams won her first game pretty handily. “I was having fun playing and was a close second to the returning champion going into final. When Alex Trebek said, ‘Our champion doesn’t look too happy,’ that’s when it hit me – I might win this thing!” Beams also won the following game, which was a nail biter. Jeopardy tapes five shows a day and her two victories were games four and five. Then her family piled into the rental car and went out to dinner to celebrate. Along the way, Beams’ sister speculated on rental cars vs. Uber and the ride sharing company’s origins. “Didn’t Uber start in San Francisco?” she mused. That would be one of the questions on the show the next day when Beams returned. Luck, remember? (After Beams received her winnings, she wrote her sister a check for the amount of the clue.) Also, Beams hit the Daily Double late in her first game. Thanks to many hours of playing “Where in the World is Carmen Sandiego?”… she knew what Interpol was. For her second 14

Alex Trebek and Deborah Beams

Deborah Beams at the Governmental Accounting Standards Board

game, it seemed almost hopeless by Final Jeopardy. But Beams did her math, expecting her opponents to bet big, and left herself enough cushion for when all three contestants missed it. Even though she came out ahead that round, Beams earned less money than the person placing second, who always receives a flat $2,000. Beams finished with $1,300, but it was enough to win. She chuckles, “It was probably one of the 25 lowest winning scores in “Jeopardy!” history.”

Transplanted to Texas Beams spent most of her childhood in Wisconsin, moving to Tyler, Texas, when she was a sophomore in high school. She admits to having more than a little culture shock, plus no clear sense of what she wanted to study for a future career. “I wanted to be a teacher; I wanted to be an engineer,” she reminisces. “By the time I was really looking at college, I knew I had to figure something out. I liked math and mom mentioned accounting. So I looked into it. Senior year, we had a day when we each ‘shadowed’ someone in their work. I got paired with Kathy Kapka (2015-16 TSCPA chairman) over at University of Texas at Tyler and really have to credit her for launching my career. She even hired me as a student assistant during two summers while I was in college.” A graduate of the University of North Texas, Beams enjoys going back for Homecoming and other events. For upcoming accountant students, she advises: “Remember that your professional honesty and integrity start in school. While that’s not an issue for most accounting majors, my mind still boggles over the one I caught plagiarizing on an ethics assignment, of all things, when I was a grader for one of the professors. Also, take the (CPA) exam as soon as you can, while the information is fresh, and you’re Today’sCPA

EACH YEAR, AROUND 80,000 PEOPLE TAKE JEOPARDY PRODUCTIONS’ ONLINE TESTS TRYING TO SCORE HIGH ENOUGH TO BE CHOSEN FOR AN AUDITION.

still in the habit of studying and taking tests.” Beams, an accounting and auditing assistant director with BKD, also hopes accounting majors fully realize all the different ways they will be able to apply their degree. “I am passionate about governmental accounting. It’s a very specialized area, but it’s highly important when it comes to the public interest. It matters where that money is going. So find what interests you and make that yours.” When she’s not protecting our tax dollars, Beams plays violin for her church orchestra, the New Life Symphony Orchestra, and has performed at Carnegie Hall, Tchaikovsky Hall in Moscow and the Sydney Opera House. “My fourth-grade self couldn’t have imagined that when I started,” smiles Beams. “My dad says he remembers the day I brought home that half-sized violin and just made noise. It’s a nice outlet now. I remember one time I’d had a particularly hard day – I really didn’t feel like going to rehearsal. But I was able to take out my frustrations through the music. It can be very cathartic.”

Da DA Da Da, Da DA Dum Does Beams hear the Final Jeopardy music in her sleep? She claims: “No, I don’t even remember hearing it on stage. “Jeopardy!” is a good memory, so fun to be there and see how it works. I met neat people from all over the country. I had relatives from five states come to the taping. It was a dream come true just to get to do it. That I won was extra sweet.” What do most people ask about her moment in game show history? “What are you going to do with the money?” Beams replies. “For me, it was a trip to New York to see ‘Hamilton’ this past September. Back when I spent three years in Connecticut as a practice fellow at the Governmental Accounting Standards Board (GASB), I thought about seeing the production while it was off-Broadway, but passed. Then it became the biggest thing ever. It definitely deserves all the hype – it was amazing!” Although she missed out on “Hamilton” the first time around, Beams’ work with GASB during that time proved to be a turning point in her career, cementing her desire to pursue governmental accounting as her specialty. She reflects: “Many people commented how calm and poised I appeared on television. I credit much of that to my time at GASB, three years of making presentations to the Board (highly respected members of the profession) that were also webcast. Beams adds: “The GASB board and staff had a group dinner the night of my first show and made the restaurant turn on the game. I heard there was lots of loud cheering. They acted as if it was the Final Four!” n Today’sCPA January/February 2018

BUSINESS PERSPECTIVES

Merger Mania

By Mano Mahadeva, CPA, MBA | Column Editor

slew of consolidations across a swath of industries has sparked anxiety among company chiefs. The transacted amounts are getting bigger as companies become giants to combat other giants. Traditional merger or acquisition activity leading to economies of scale, top-line growth, buying versus build, synergism and boosting market share are still in vogue, but are now a secondary focus. The new normal is about a strategic positioning of a combined business, forging into areas outside of one’s core business, joining forces with another to add innovative solutions, pre-emptive moves to preserve a position and even talent acquisition. Amazon, which recently bought Whole Foods, and other internet giants, such as Google, Facebook, Baidu and Alibaba, are challenging companies to rethink and reinvent their business models to remain competitive. As an example, drug retailers fear the prospect of Amazon entering their business. The e-commerce titan was recently reported to have sought regulatory approval to distribute pharmaceutical products in over a dozen states. In addition, Amazon’s relentless focus on customers and its willingness to forgo profits for years make them a major potential threat to pharmacies. So, it was not a shocker to hear about the merger between CVS Health and health care giant Aetna, creating a vertical merger (up and down a chain of activity), valued north of $69 billion, with two complementary businesses joining forces (in this case, a supplier and its customer). This contrasts with a horizontal merger where two competing companies create an enormous entity that can squelch competition and customer choice. This merger is likely a preemptive move against retail giant Walmart and online retailer Amazon, which are contemplating entry into the multibillion-dollar health care industry. The merger also shows how health care companies are forging deeper into businesses outside their traditional core to maintain market share. AT&T plans to usher in the next evolution in digital entertainment by acquiring Time Warner’s world-class content for $100+ billion; it includes HBO, TBS, TNT and Warner Brothers with its own vast distribution in wireless service and pay TV. Like the CVS-Aetna merger, the economics revolve around a vertical merger that combines companies at different points in the value chain, rather than combining two competitors. The vertical integration makes it more difficult for the government to prove how consumers could be harmed. Could this create a strong incentive to stifle competition from new content providers? That is for the courts to decide. The Bayer and Monsanto deal announced last year intends to Mano Mahadeva, CPA 16

reshape the world’s food supply. This $66 billion agricultural conglomerate wants to reorganize the development of seeds and pesticides necessary to fuel the supply of food. Decried as unsafe, genetically modified seeds have allowed for greater harvesting efficiency, stronger pest resistance and the wider spread of crops around the globe. The market for seeds and other agricultural materials has been dominated by a few companies – assuming success of this merger, it would leave just three giants in this sector. There are many other deals in the pipeline. Broadcom is targeting Qualcomm in a $105 billion takeover battle between two of the world’s biggest chipmakers, likely the largest ever in the technology space. Disney is poised to shake up the media industry with a $60 billion offer for Fox. A spate of hospital deals stands to further remake the U.S. health care landscape. Ascension and St. Joseph Health, a pair of nonprofit organizations that together have 190 hospitals across 27 states, are in deal talks looking to preserve market share. A Catholic Health Initiatives and Dignity Health combination of 139 hospitals in 28 states will try a newly popular two-pronged leadership approach to counter insurers’ push into providing care. The temptation to opt for a merger or acquisition is great – being the hunter is better than being the hunted. And being the chief of a bigger company may justify larger compensation! But getting a deal done is not that simple. Stock-for-stock transactions have slowed down, due to higher and potentially unsustainable equity valuations today. Horizontal mergers are very difficult to get through as shown by the Aetna-Humana and Anthem-Cigna deal failures. Vertical mergers, which seem easier to navigate through legal and regulatory processes, may not be as simple, due to Sen. Elizabeth Warren and President Donald Trump becoming odd antitrust bedfellows. The tax reform plans, valuation disagreements, bidding costs, due diligence issues and our nationalist climate are more barriers over which acquirers must leap. Investors need to be wary. We understand mergers and acquisitions are fraught with complexities and uncertainties. The resulting activity is bumpy, rapidly changing and challenging. As a result, it is difficult to know what to do and where to look. The end zone is always hazy with no specific goal posts. So why go through all this? Well, each of us thinks our deal is the exception to the rule! Success with mergers and acquisitions should be measured in ways like having success in investing – that is when intrinsic value is greater than the price paid. n

serves on the Editorial Board for TSCPA. He can be reached at manomahadeva@gmail.com.

Today’sCPA

TAKE NOTE 2018 Outstanding Accounting Educator Award Nominations Due March 2

Connecting on TSCPA’s New Online Community: TSCPA Exchange

Do you know an accounting educator who deserves recognition? TSCPA is accepting nominations for 2018 Outstanding Accounting Educator Awards. This award recognizes Texas accounting educators who have demonstrated excellence in teaching and have distinguished themselves through active service to the accounting profession.

Have you visited our new online community, TSCPA Exchange? Members are now connecting and discussing critical accounting issues, including the new tax-reform law, in real time. TSCPA Exchange is an excellent resource for members to use to ask questions and communicate with their accounting colleagues in a private, members-only forum.

The award recipients will be honored during TSCPA’s annual Accounting Education Conference, and each recipient will receive a $500 award, a recognition plaque and complimentary registration to the Accounting Education Conference. The deadline for nominations is March 2, 2018. For more information and to complete the nomination form, please go to the TSCPA website at https://www.tscpa.org/about-tscpa/awards/outstanding-accountingeducator-award/outstanding-accounting-educator-award-form or contact TSCPA’s Catherine Raffetto at craffetto@tscpa.net or 800-428-0272, ext. 216 (972-687-8516 in Dallas) for more information. n

We know the value our members place on belonging to this professional network and we’re excited to provide this online environment where you can connect with fellow TSCPA members as an industry resource. The ways to engage are endless and the more members who contribute, the more valuable the community becomes. Go to exchange.tscpa.org today and join the discussion. n

Accountants Confidential Assistance Network The Accountants Confidential Assistance Network (ACAN) supports Texas CPAs, CPA candidates and/or accounting students who are addressing alcohol, chemical dependency and/or mental health issues. ACAN provides a confidential phone line at 1-866-766-ACAN to help people who need assistance or you can also contact TSCPA’s Craig Nauta at cnauta@tscpa.net. ACAN groups and Friends of Bill Wilson meet regularly at the following times and locations.

CGMA® Designation for Management Accounting Professionals The Chartered Global Management Accountant (CGMA) designation was created by AICPA and the Chartered Institute of Management Accountants (CIMA) to recognize U.S. CPAs and CIMA members who work in management accounting roles. The CGMA is a respected complement to your CPA license.

Austin Covenant Presbyterian Church 3003 Northland Drive Third Friday of the month, 12 p.m.

The CGMA designation is backed by a number of benefits, including CGMA magazine and newsletter, tools and reports, videos, educational opportunities, a community/global network and more. For information about CGMA benefits, requirements and what the designation can do for your career, visit their website at cgma.org. n

Dallas Saint Michaels and All Angels Church 8011 Douglas Ave. Every Monday, 6:15 p.m.

Students Win Tuition/Book Reimbursements In a random drawing of 2017-18 student members majoring in accounting, four student members recently won $250 tuition/book reimbursements provided by the Accounting Education Foundation of TSCPA, Inc. TSCPA congratulates these four students:

Houston LCL/ACAN Meeting Wortham Tower Cafeteria 2727 Allen Parkway Every Monday, 7:30 a.m. San Antonio Eileen Lanagan, P.C. 11950 Starcrest, Ste. 201 2nd Monday evening, 6 p.m. Today’sCPA January/February 2018

• Lisa Carpenter – University of Houston Downtown • Claudia Karina Moreno – University of Texas Rio Grande Valley • Jessica L. Sajak – Austin Community College n

• Megan Schumacher – University of Texas at Austin

n 17

TAKE NOTE Statement of Ownership

Submit an Article to Today’s CPA Magazine Do you have expertise in a certain practice area that would be important to cover in Today's CPA magazine? The editors are currently seeking articles for consideration in upcoming issues. We are soliciting technical submissions in all areas, including taxation, regulation, auditing, financial planning, ethics and corporate governance, information technology, and other specialized topics. The magazine features articles and columns that focus on issues, trends and developments affecting CPAs in all facets of business. If you would like to submit an article for consideration or to learn more, please contact managing editor DeLynn Deakins at ddeakins@tscpa.net or technical editor Brinn Serbanic at technicaleditor@tscpa.net. n

Disciplinary Actions As a result of decisions by a hearing panel of the Joint Trial Board, the following members had their TSCPA memberships: Expelled –

•

Aurelia E. Weems of Conroe was found guilty of violating TSCPA Bylaws Article III, Section (8)(d) for failure to cooperate with an ethics investigation. She was expelled from TSCPA effective Nov. 24, 2017. Mahesh K. Thakkar of Frisco was found guilty of violating TSCPA Bylaws Article III, Section (8)(d) for failure to cooperate with an ethics investigation. He was expelled from TSCPA effective Nov. 24, 2017. n

Today’sCPA

CAPITOL INTEREST

In the Interim

By John Sharbaugh, CAE | TSCPA Managing Director, Governmental Affairs

he Texas Legislature meets in regular session every other year for a period of 140 days. This puts Texas in a distinct minority of four states with legislatures that meet on a biennial basis. The other 46 states meet every year. In the early 1960s, only 19 state legislatures met annually. By the mid-1970s, the number of states meeting annually grew tremendously, going up to 41. And now that list stands at 46 states. There are some who argue that Texas should get with the times and go to a full-time legislature that meets every year to better deal with the complexities of our modern society. Thus far, that argument has not prevailed in Texas. According to the political folks who study these things, some of the arguments that favor a biennial session include: • There are enough laws. Biennial sessions constitute a safeguard against hasty and unseemly legislative action. • The biennial system affords legislators more time to renew relations with constituents, to mend political fences and to campaign for reelection. • Annual sessions inevitably lead to a spiraling of legislative costs, for the legislators and other legislative personnel who are brought together twice as often. • The interval between sessions may be put to good advantage by individual legislators and interim study committees, since there is never sufficient time during a session to study proposed legislation. In line with this last point, the 86th Texas legislative session won’t begin until Jan. 8, 2019, but the work for that session has already started. During this time between regular sessions, also known as the “interim,” the lieutenant governor and speaker of the House issue interim charges that instruct legislative committees to study important issues and research information about a variety of topics to help guide future legislative decisions. The committees will also hold hearings to get public input about their charges. Back in the fall, Lt. Gov. Dan Patrick issued 81 general interim charges to various Senate committees and 25 interim charges specifically related to Hurricane Harvey and state preparations for future natural disasters. Speaker of the House Joe Straus issued 231 interim charges to House committees, five of which were previously announced relating to Hurricane Harvey.

A New Speaker of the House Probably the biggest news thus far during the interim was the announcement by Speaker Straus that he will not run for reelection to his House seat in November. Thus, when the legislature returns in 2019, the House will be electing a new speaker for the first time in a decade. Straus was elected speaker in 2009 and has served five terms, making him the longestserving Republican in that role. He is tied with two Democrats (Pete Laney and Gib Lewis) for the most terms leading the House. The election of the next speaker by House members will take place once the legislature convenes in January of 2019. It is anticipated to be a controversial election process. Texas House Republicans voted in December to pre-select their House speaker candidate for the 2019 legislative session John Sharbaugh, CAE

and beyond, effectively bypassing Democrats in filling the powerful leadership position. The speaker plays a major role in deciding what issues and proposed legislation make it on the agenda for the House to consider. So, it will be interesting to see who will fill this role in 2019. My guess is whoever is elected to be the next speaker, he/she is likely to be more conservative than Joe Straus, but we will see. That’s why they hold elections.

An Election Year 2018 is an election year in Texas and the outcome of it will also be a major determinant of what may happen in the next legislative session. Primaries will be held on March 6. If a run-off is needed, that will occur on May 22 and the general election will be held on Nov. 6. All 150 House seats are up for grabs and 15 of the 31 Senate seats are, as well. In addition to Straus forgoing a run for reelection, several other current legislators have announced their intent to step down. Thus, the political landscape at the Capitol will be changing for 2019 as many new people assume these elected offices. Once the elections are over, TSCPA will be working to identify members/ CPAs who know these newly elected officials or are willing to build those relationships and be a part of our “Key Person Program.” Having key persons who can help communicate with legislators about issues of concern to the CPA profession is a vital part of our advocacy program. The TSCPA CPA-PAC will also be active during the upcoming campaign process. This is the opportunity for the CPA profession, through its PAC, to provide financial support to good candidates who are business friendly and supportive of the accounting profession. If you have not contributed to the CPA-PAC, I encourage you to do so. It’s another valuable part of TSCPA’s advocacy efforts. You can contribute by going to the CPA-PAC website at www.txcpapac.org. 2019 will be an important legislative year for CPAs as the Texas Public Accountancy Act (TPAA) and the Texas State Board of Public Accountancy (TSBPA) go through the sunset review process. We will be preparing for that challenge as we head into the 2019 legislative session. Make Sure You Vote Most importantly this year, make sure you take the time to vote in the various elections that will be held and encourage your colleagues to vote, as well. Voting is our right and privilege as citizens, but many people do not exercise it. Texas has one of the lowest voter participation rates in the country. According to the Texas secretary of state’s office, in the last election for state offices (2014), the turnout of “registered voters” in Texas was only 33.7 percent. Participation was worse for those of “voting age population” coming in at only 24.99 percent, as many eligible people do not even register to vote. That means that only a quarter of the eligible voters in Texas are electing those who represent us in Austin. Democracy only works if we take the time to participate in the process. Make sure your vote counts! n

is TSCPA’s managing director of governmental affairs. Contact him at jsharbaugh@tscpa.net.

Today’sCPA January/February 2018

FEATURE ARTICLE

Reorganization of PCAOB Auditing Standards

By Bradley P. Lawson and Angela Wheeler Spencer

nder the Sarbanes-Oxley Act of 2002 (SOX), the Public Company Accounting Oversight Board (PCAOB) was given authority, subject to oversight by the Securities and Exchange Commission (SEC), to create and establish auditing and professional practice standards for firms providing audit services to publicly traded clients and broker-dealers. Initially, PCAOB adopted the existing auditing standards issued by the American Institute of CPAs (AICPA) until such time as PCAOB created or established its own standards. 20

Since that time, PCAOB has issued 18 auditing standards that supersede or amend many portions of AICPAâ&#x20AC;&#x2122;s standards. However, many of the original AICPA standards are still effective for auditors of publicly traded companies. This structure for auditing standards resulted in two sets of overlapping standards with different organizational approaches and referencing (i.e., numbering) systems. In response, PCAOB undertook a project to reorganize the auditing standards into a single, integrated system based on topical areas that generally follow the flow of the audit process. Todayâ&#x20AC;&#x2122;sCPA

The resulting reorganized standards were approved by the SEC and became effective Dec. 31, 2016, and the procedures for researching and referencing auditing standards have changed. This is particularly important to know, because it impacts how accounting professionals search and reference the standards as part of their daily tasks. This article provides a brief history of how PCAOB created its current set of standards and describes the structure and referencing procedures of the reorganized standards.

Background and Timeline of Changes The U.S. Congress passed SOX in response to the fraud and accounting scandals of the late 1990s and early 2000s (e.g., Enron, Worldcom, Tyco, etc.). SOX contains several provisions that expand the SEC’s regulatory oversight of publicly traded companies. However, Title I of SOX also established PCAOB “to oversee the audits of public companies that are subject to the securities laws, and related matters, in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports for companies…” (SOX 2002). The establishment of PCAOB via SOX was significant, because the auditing profession was no longer self-governed. Instead, the profession became subject to oversight by a quasi-governmental organization. One of the duties SOX assigned to PCAOB is the authority to establish rules concerning auditing, quality control practices, ethics, independence and other standards relating to the preparation of audit reports (Section 101.c.2). Although PCAOB is subject to SEC oversight and approval of any rule changes, this provision within SOX establishes PCAOB’s responsibility for creating auditing rules that govern the practice and profession of auditing. In April 2003, PCAOB adopted the generally accepted auditing standards (GAAS) published and established by the Auditing Standards Board (ASB) of AICPA as of April 16, 2003. In addition to Statements of Auditing Standards (SAS) established by the ASB, this adoption included general standards on auditing and standards related to field work and audit reports, as adopted by the AICPA membership (PCAOB Release No. 2003-006). PCAOB adopted these existing standards on an interim basis until they were amended or superseded with new standards issued by PCAOB. Additionally, PCAOB continued to use the existing structure of the SASs. That is, they were organized and codified based on topic and referred to using “AU Section” references. For example, AU Section 300 – The Standards of Field Work – included topics such as “Communications Between Predecessor and Successor Auditors” (AU Section 315), which captured SAS No. 84 and 83. Since that time, however, PCAOB has issued 18 auditing standards of its own. These auditing standards have been referred to as “AS standards” and ordered sequentially by issuance date. This approach to standards is in contrast to the topical approach Today’sCPA January/February 2018

THE TOPICAL STRUCTURE OF THE REORGANIZED STANDARDS IS VERY DIFFERENT FROM THE PREVIOUS APPROACH.

used by the ASB’s standards. The result was two overlapping sets of standards with different numbering and reference systems: 1) the standards issued through AICPA, which were adopted by PCAOB on an interim basis and have since been partially amended, and 2) the sequential standards issued by PCAOB itself. Due to these overlapping sets of standards, PCAOB proposed in March 2013 to reorganize the “existing interim and PCAOBissued auditing standards into a topical structure with a single integrated numbering system” (PCAOB Release No. 2013002). PCAOB received 19 comment letters in response to the proposal, which were generally in favor of the reorganization of the standards. In May 2014, PCAOB issued a supplemental request for comment regarding the proposed reorganization. The supplemental request presented further details regarding the proposed amendments, an online demonstration of the reorganization and refinements to the initial proposal. In March 2015, PCAOB issued the final proposed rule. The final proposed rule consolidated the two sets of standards into “a single, integrated numbering system and a topical structure that generally follows the flow of the audit process” (PCAOB Release No. 2015-002). The SEC granted final approval for the new rule in September 2015. The reorganized standards under the proposed rules became effective starting Dec. 31, 2016.

What Do the Reorganized Standards Change? The reorganization does not change the fundamental guidance or rules governing the audits of publicly traded companies. Certain section numbers, cross-references, titles or phrases were changed or updated to consolidate the ASB’s interim standards and PCAOB-issued standards. For example, instead of referring to procedures in accordance with GAAS, the reorganized standards refer to auditing procedures in accordance with standards of PCAOB or PCAOB auditing standards. Additionally, PCAOB continued on next page 21

FEATURE ARTICLE continued from previous page rescinded certain interim standards (e.g., AU sec. 150, Generally Accepted Auditing Standards; AU sec. 201, Nature of General Standards), because the requirements within those standards have either been superseded or are duplicated by other PCAOB standards. Although the reorganization does not change the fundamental content of the standards, the topical structure of the reorganized standards is very different from the previous approach. The reorganized standards are grouped into the following five topical categories, with a four-digit referencing system assigned to each category: General Auditing Standards (AS 1000s); Audit Procedures (AS 2000s); Auditor Reporting (AS 3000s); Matters Relating to Filings Under Federal Securities Laws (AS 4000s); and Other Matters Associated with Audits (AS 6000s). AS 5000 is reserved for later use. There are also subcategories within each of these categories that further organize the standards by primary or main topic. For example, the subcategory AS 1300 – Auditor Communications is located under AS 1000 – General Auditing Standards, while AS 2100 – Audit Planning and Risk Assessment is under AS 2000 – Audit Procedures. A complete listing of the reorganized standard’s categories and subcategories is provided in Table 1. Additionally, PCAOB has provided detailed resources on their website that map the pre-reorganized standards (i.e., the AU sections and AS 1 - 18) into the new, reorganized standards. When referencing the reorganized standards, it is important to note that the reorganized standards still retain the “AS” prefix and designation system. This is consistent with PCAOB’s previous reference designation and, along with the four-digit code, helps distinguish PCAOB’s standards from standards of other governing bodies, such as the ASB or the International Auditing and Assurance Standards Board (IAASB). For example, when citing the standards concerning audit sampling and projections of misstatement, practitioners will reference “AS 2315 – Audit Sampling, Performance and Evaluation, Paragraph 26,” which can be referenced more succinctly as AS 2315.26. Along with the reorganized standards, PCAOB also adopted almost all of AICPA’s auditing interpretations. The interpretations provide additional guidance regarding the audit process and, as required under the previous standards, auditors should be aware of and consider auditing interpretations applicable to their audit process. PCAOB now identifies the interpretations in the “Guidance” section of their website. Similar to the reorganized standards, the interpretations are identified

Bradley P. Lawson, Ph.D., CPA

Angela Wheeler Spencer, Ph.D., CPA

with an “AI” prefix and have been numbered consecutively using a two-digit referencing system. The title of each interpretation also concludes with a reference to the related auditing standard. For example, interpretations regarding the work of specialists in the audit is included in “AI 11 – Using the Work of a Specialist: Auditing Interpretations of AS 1210.” The first paragraph in this interpretation would be referenced as AI 11.01.

A Better Search and Reference Tool Since the enactment of SOX in 2002, PCAOB has issued standards to guide the audit function for audits of publicly traded companies. Although PCAOB has issued 18 auditing standards since that time, many of AICPA’s previously established standards (the “interim standards”) remain in effect. As a result, current audit practitioners have been subject to two overlapping sets of standards that are organized in different ways and contain different referencing approaches. PCAOB’s reorganization process consolidates the two sets of standards and referencing approach into one system. “Thus, the reorganization, including the amendments, is not expected to affect the manner in which audits are performed and reported under PCAOB standards… [Instead,] reorganizing the PCAOB standards into a single, integrated organizational structure should make it easier for auditors and others to navigate, use and apply the standards” (SEC Release 34-75935). Professionals need to be aware of these reorganized standards, because it impacts how they search and reference the professional standards as part of their daily tasks. n

References 1. PCAOB. Establishment of Interim Professional Auditing Standards. Release No. 2003006. PCAOB, 2003. 2. PCAOB. Proposed Framework for Reorganization of PCAOB Auditing Standards and Related Amendments to PCAOB Auditing Standards and Rules. Release No. 2013002. PCAOB, 2013. 3. PCAOB. Reorganization of PCAOB Auditing Standards and Related Amendments to PCAOB Standards and Rules. Release No. 2015-002. PCAOB, 2015. 4. Sarbanes-Oxley Act of 2002. Pub. Law no. 107, 116 Stat. 745, 2002. 5. SEC. Public Company Accounting Oversight Board; Order Granting Approval of Proposed Rules to Implement the Reorganization of PCAOB Auditing Standards and Related Changes to PCAOB Rules and Attestation, Quality Control, and Ethics and Independence Standards. Release No. 34-75935. SEC, 2015.

is an assistant professor of accounting at Oklahoma State University. He has published articles in the journals Contemporary Accounting Research, Accounting Horizons and Journal of Corporate Accounting & Finance. His teaching and research interests include auditing, accounting information systems and corporate governancerelated topics. He may be contacted at brad.lawson@okstate.edu. is an associate professor of accounting at Oklahoma State University and holds the W. Haskell Cudd Professorship. Her teaching and research focuses on financial accounting and her research has appeared in journals such as The CPA Journal, The Accounting Review and Accounting Horizons. She may be contacted at angela.spencer@okstate.edu.

Today’sCPA

Table 1. Reorganized Standards General Auditing Standards (AS 1000s) – Standards on broad auditing principles, concepts, activities and communications AS 1000 – General Principles and Responsibilities AS 1100 – General Concepts AS 1200 – General Activities AS 1300 – Auditor Communications Audit Procedures (AS 2000s) – Standards for planning and performing audit procedures and for obtaining audit evidence AS 2100 – Audit Planning and Risk Assessment AS 2200 – Auditing Internal Control Over Financial Reporting AS 2300 – Audit Procedures in Response to Risks – Nature, Timing and Extent AS 2400 – Audit Procedures for Specific Aspects of the Audit AS 2500 – Audit Procedures for Certain Accounts or Disclosures AS 2600 – Special Topics AS 2700 – Auditor’s Responsibilities Regarding Supplemental and Other Information AS 2800 – Concluding Audit Procedures AS 2900 – Post-Audit Matters

Auditor Reporting (AS 3000s) – Standards for auditors’ reports AS 3100 – Reporting on Audits of Financial Statements AS 3200 – Reserved AS 3300 – Other Reporting Topics Matters Relating to Filings Under Federal Securities Laws (AS 4000s) – Standards on certain auditor responsibilities relating to SEC filings for securities offerings and reviews of interim financial information Other Matters Associated with Audits (AS 6000s) – Standards for other work performed in conjunction with an audit of an issuer or of a broker or dealer.

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Today’sCPA January/February 2018

FEATURE ARTICLE

Due Diligence Requirements for Tax Return Preparers, Part 1

By Paul M. Budd, J.D., LL.M., MBA

ne of the biggest challenges for a tax preparer is balancing two conflicting interests. On the one hand, a preparer is expected to carefully prepare precise and accurate returns without error. On the other hand, he/she is expected to file timely returns under strict time constraints imposed by unforgiving filing deadlines. Balancing the need for precision and timeliness forces a preparer to address a difficult question regarding each return. How much careful due diligence must be performed while also complying with filing deadlines? This article summarizes the due diligence requirements for federal tax return preparers. It discusses diligence measures practitioners are expected to take to avoid careless mistakes. It also explains how the proper diligence measures, if taken, can help shield a preparer from penalties even when he/she makes a mistake. Finally, it illustrates the due diligence requirements with a few examples.

Preparer Penalties under the Internal Revenue Code The Internal Revenue Code (the Code) is the primary source of rules regulating tax preparers. Code section 6694(a) imposes a penalty against tax return preparers who prepare a return or refund claim that understates a taxpayer’s tax liability if the understatement is due to an “unreasonable position” taken and he/she “knew or reasonably should have known” the 24

position was unreasonable.1 This penalty applies to each return or refund claim containing an understatement and is the greater of $1,000 or 50 percent of the income the preparer derived from each erroneous return.2 In addition to the Code’s penalties, a state or federal licensing board may impose further disciplinary actions against a licensed tax professional found liable for preparer penalties. Additional consequences may include anything from a public censure to revoking the professional’s license to practice. Section 6694 broadly defines a “preparer” as anyone who prepares a return for compensation.3 Anyone paid to prepare a tax return may be subject to preparer penalties, regardless of whether the person is a CPA, accountant, attorney or otherwise. Furthermore, a preparer does not have to sign a tax return to be assessed penalties. Merely advising a taxpayer may subject someone to preparer penalties.4 Fortunately, section 6694 is not a strict liability penalty. Penalties apply only if a preparer “knew or reasonably should have known” that a tax return position resulting in an understatement was “unreasonable.”5 The question then becomes: When should a preparer reasonably know a position is unreasonable? Stated another way, what due diligence measures should be taken to ensure that all the positions on a taxpayer’s return are objectively reasonable? While the Code provides no clear answer, it does gives some guidance in the form of a due diligence exception. Today’sCPA

The Due Diligence Exception: Good Faith and Reasonable Cause Like most rules, the Code carves out an exception to section 6694 preparer penalties. If a preparer understates a taxpayer’s liability on a return, penalties will not apply if there is a “reasonable cause for the understatement and the tax return preparer acted in good faith” when preparing the return.6 This is referred to as the “reasonable cause and good faith” exception. The exception will not apply if a preparer willfully or recklessly takes an unreasonable position that causes an understatement.7 Determining when an error is due to “reasonable cause” and when someone acts in “good faith” can be difficult. These somewhat ambiguous standards impose a due diligence requirement. If a practitioner acts in good faith when preparing a return by performing sufficient due diligence, but still makes an error that results in an understatement, the understatement is likely due to reasonable cause, because he/she acted in good faith by performing sufficient due diligence. If, however, a practitioner does not act in good faith by carelessly failing to perform sufficient due diligence when preparing a return, any error resulting in an understatement is likely due to negligence rather than a reasonable cause. So what due diligence steps should be taken to ensure that any mistakes are due to reasonable cause and good faith? Code section 6694’s corresponding Treasury Regulations (the Regulations) list six factors that help a preparer make that determination. Six Factors for Reasonable Cause and Good Faith The Regulations say that all the “facts and circumstances” should be considered to determine whether an understatement was due to reasonable cause and if a preparer acted in good faith.8 The Regulations list six factors to help make this facts and circumstances determination.9 If some or all of the factors weigh in a preparer’s favor, they will strengthen his/her case against penalties under the reasonable cause and good faith exception. The following six factors provide some guidance on due diligence measures expected to avoid preparer penalties. Nature of the Error. If the error resulted from a provision of the Code that was complex, uncommon or highly technical, and a competent tax return preparer could have made the mistake, this factor will support the reasonable cause and good faith exception.10 However, if the error would be easily apparent from a general review of the return, the reasonable cause and good faith exception will not apply.11 Frequency of the Error. If the understatement is due to an isolated error, such as a mathematical or clerical mistake, the reasonable cause and good faith exception will generally apply.12 But if the understatement is due to an isolated error that is “so obvious, flagrant or material that it should have been discovered during a review of the return . . .” the exception will not apply.13 If there is a pattern of errors on a return, the exception will not apply.14 Materiality of the Error. If the error resulted in a small, immaterial understatement in relation to the taxpayer’s total tax liability, the reasonable cause and good faith exception will generally apply.15 But minor, immaterial errors may not qualify for the exception if they are sufficiently obvious or frequent.16 Today’sCPA January/February 2018

Six Factors for Reasonable Cause and Good Faith • • • • • •

Nature of the Error Frequency of the Error Materiality of the Error Tax Return Preparer’s Normal Office Practice Good Faith Reliance on Advice of Others Reliance on Generally Accepted Administrative or Industry Practice

Tax Return Preparer’s Normal Office Practice. If a tax preparer has normal office procedures in place to ensure the consistent, accurate preparation of tax returns, and he/she made an error on a return despite following those normal office procedures, and the other facts and circumstances indicate the error would rarely occur, then this factor will weigh in the practitioner’s favor for the reasonable cause and good faith exception. “Normal office practices” are essentially due diligence measures. The Regulations describe good normal office practices as “a system for promoting accuracy and consistency in the preparation of returns or claims for refund and generally would include, in the case of a signing tax return preparer, checklists, methods for obtaining necessary information from the taxpayer, a review of the prior year’s return and review procedures.”17 Even if a preparer follows sufficient normal office practices, however, the reasonable cause and good faith exception will not apply if he/she makes a flagrant error, a pattern of errors or a repetitive error on numerous returns.18 Good Faith Reliance on Advice of Others. If a preparer reasonably relies in good faith on advice or information (oral or written) furnished by a taxpayer or another party, and the advice or information leads to an understatement, he/she will likely qualify for the reasonable cause and good faith exception.19 A preparer does not reasonably rely in good faith on advice or information if (1) the advice or information is unreasonable on its face; (2) he/ she knew or should have known that the party providing the advice or information was not aware of all the relevant facts required to render the advice for the tax return; or (3) he/she knew or should have known, given the nature of his/her practice, at the time the return or refund claim was prepared, the advice or information was no longer reliable due to developments in the law after the advice or information was given.20 Reliance on Generally Accepted Administrative or Industry Practice. If a preparer reasonably relies in good faith on generally accepted administrative or industry practices when taking an erroneous position on a return that causes an understatement, he/ she may qualify for the reasonable cause and good faith exception.21 He/she is not considered to rely in good faith on such practices if, at the time the return or refund claim is prepared, “the tax return preparer knew or should have known (given the nature of the tax return preparer’s practice) . . . the administrative or industry practice was no longer reliable due to developments in the law or IRS administrative practice since the time the practice was developed.”22 continued on next page 25

FEATURE ARTICLE continued from previous page Good Faith Reliance on Information or Advice It is nearly impossible to prepare a tax return without relying on information provided by someone else, such as the taxpayer, bookkeeper, another accountant or any person who may have information regarding a taxpayer’s income. Since preparers must rely on the information they are provided to prepare a return, there is always the risk that the information is incomplete, inaccurate or false. It would be unreasonable and unfair to penalize a tax preparer for relying on information that someone else created and furnished. Fortunately, the Code and Regulations address this concern by expressly stating that preparers do not have to verify information or advice they receive, so long as their reliance without verification is reasonable and in good faith.23 Thus, penalties will not apply when the source of an understatement is information or advice furnished, which the preparer then relied upon in good faith.24 This rule encompasses a broad range of information and advice, including both oral and written information.25 However, if it turns out the information or advice is erroneous, the preparer bears the burden of reproducing the erroneous information to show it was the source of the understatement.26 Therefore, copies of all information received and relied upon to prepare a return should be retained, just in case the information must later be reproduced for the IRS as a defense against preparer penalties. An important aspect of the reliance rule is that a preparer is generally not required to verify every piece of information received when preparing a tax return.27 The Regulations state that a preparer may generally rely in good faith without verification on information furnished by the taxpayer or another third party.28 This includes a taxpayer’s previously filed tax returns.29 This means preparers do not have to audit, examine or otherwise question their clients’ tax return information.30 If a preparer asks a taxpayer-client for information, he/she may generally rely on whatever the taxpayer provides without having to doubt or question the information. There are two exceptions to this general rule of reasonable reliance without verification. First, a preparer cannot ignore the implications of information provided or information known that give the preparer reason to believe the furnished information may be incomplete or inaccurate.31 If a taxpayer provides records showing the taxpayer had deductible expenses, but the preparer knows the expenses were never incurred, the conflicting information cannot simply be ignored. The preparer has a duty to make reasonable inquiries to determine the validity of the information.32 Second, there is a special exception for tax benefits that require preparers to make mandatory inquiries to substantiate the furnished information before relying upon it. These special, statutory exceptions generally apply to deductions and credits especially vulnerable to tax fraud or abuse, such as the Earned Income Credit, Child Tax Credit and American Opportunity Tax Credit. Additionally, under the recently enacted Tax Cuts and Jobs Act, Congress expanded the statutory due diligence requirement to determining a taxpayer’s eligibility to file as head of a household.33 For a detailed explanation of the specific diligence requirements, see Form 8867 and section 1.6695-2(b) of the Treasury Regulations. Examples of Good Faith and Reasonable Cause Examples are helpful to understand the application of these abstract 26

rules. The following examples illustrate how and when the good faith and reasonable cause exception may apply. The examples are based on the Regulations, case law and IRS rulings. Example 1: Duty to Make Reasonable Inquires. A tax return preparer prepares income tax returns for both a doctor and the doctor’s professional corporation. While preparing the professional corporation’s returns, the preparer sees that the corporation’s books show the corporation received loans from both the doctor and from a bank during the tax year. The books also show that the corporation paid for loan interest expenses, but do not show who the corporation made the interest payments to. Despite this knowledge, the preparer does not ask the doctor if the doctor received any interest income from his corporation and reports no interest income on the doctor’s individual tax return. The doctor did, in fact, receive interest income during the year, so the preparer’s failure to report the interest income on the return results in a substantial understatement of the doctor’s tax liability. Under these facts, the preparer is liable for preparer penalties and will not qualify for the reasonable cause and good faith exception. The preparer did not act in good faith because, despite the corporate books’ implication that the doctor received interest income, the preparer did not make any reasonable inquiries into the existence of any interest income. The implication of information in the corporate books imposed a duty to make reasonable inquiries before claiming that the doctor received no interest income. The preparer could not merely rely in good faith without verification on the doctor’s failure to tell him/her about any interest income. Therefore, the preparer did not exercise the requisite due diligence of asking the doctor about any interest income before claiming on the return that the doctor received no interest income. Accordingly, the understatement resulted from the unreasonable position, which the preparer should have known was unreasonable. Thus, the preparer is subject to penalties.34 Example 2: Reasonable Reliance on Information in Previously Filed Tax Return. Tax Preparer 1 prepares a taxpayer’s 2015 return. When preparing the return, Preparer 1 negligently overstates the taxpayer’s expenses, creating a net operating loss for 2015. Next, Preparer 1 prepares amended income tax returns for the years 2012, 2013 and 2014 and claims refunds for those years based on the net operating loss carryback from 2015. Because the carryback was not exhausted in 2014, a portion of the loss was available to be carried forward to 2016. The following year, Tax Preparer 2, a different income tax return preparer, prepares the same taxpayer’s 2016 return. Preparer 2 prepares the 2016 return using information provided to Preparer 2 by the taxpayer, which includes a copy of the 2015 return prepared by Preparer 1. Preparer 2 was not aware of the negligent overstatement of expenses by Preparer 1. Preparer 2 checked the net operating loss deduction claimed in 2012, 2013 and 2014, so the taxpayer could claim what Preparer 2 believed to be the proper net operating loss deduction on the 2016 return. The net operating loss deduction constituted a substantial portion of the taxpayer’s 2016 return. Under these facts, Preparer 2 will be assessed no penalties, because he/ she may reasonably rely without verification on the taxpayer’s previously filed tax returns when preparing a return. However, Preparer 1 may be assessed separate penalties for each tax year return affected by the negligent or intentional overstating of expenses on the taxpayer’s 2015 Today’sCPA

return. Therefore, Preparer 1 may be penalized for the 2016 return even though it was prepared by Preparer 2.35 Example 3: Reasonable Reliance on Taxpayer Information. A tax preparer prepares the income tax return for a taxpayer who claims to have incurred deductible entertainment business expenses. Under the requirements of section 274(d) of the Code, the preparer asks the taxpayer if the taxpayer has records substantiating the amount, time, place, business purpose and business relationship relating to entertainment expenses. The taxpayer tells the preparer that the taxpayer has the required records. The preparer relies on this information and files the return, claiming a deduction for entertainment expenses in the amount indicated by the taxpayer. Upon examination, the IRS disallows a portion of the claimed entertainment expense deductions, because the taxpayer does not have the records needed to substantiate the business entertainment expenses. The deductions are disallowed and the preparer understated the taxpayer’s liability. Here, the preparer is not assessed preparer penalties under the reasonable cause and good faith exception. The taxpayer told the preparer that the taxpayer had the substantiating records for the business expenses. The preparer could reasonably rely on this information without having to verify it. And the preparer acted in good faith by making appropriate inquires on whether the taxpayer had the records needed to claim an entertainment expense deduction. Therefore, despite the understatement of liability, the preparer is not assessed preparer penalties.36 Example 4: Failure to Make Appropriate Inquires. The same facts as Example 3, except it is one year later. The same preparer completes the tax return for the same taxpayer for the year following the IRS’ examination and disallowance of the entertainment expense deductions for the prior year. The preparer and taxpayer go through the exact same routine: the taxpayer wants to claim an entertainment expense deduction; the preparer asks the taxpayer if the taxpayer has the substantiating records; the

Paul M. Budd, J.D., LL.M., MBA

taxpayer says the records exist, but does not produce them; the preparer believes the taxpayer and claims the deduction; and the IRS later audits and disallows the deduction, because the taxpayer again does not have the records. Now, unlike the previous year in Example 3, the preparer will likely be assessed preparer penalties. Unlike Example 3, the preparer now has a reasonable basis to doubt the taxpayer’s assertion that the taxpayer has the records. The preparer knows of the prior year’s disallowance of the deduction since the taxpayer did not have the substantiating records. Therefore, while the preparer’s inquiry about records was reasonable in Example 3, the preparer’s inquiry in this example was unreasonable. Preparer’s knowledge from past experience required the preparer to make further inquiries to determine whether the taxpayer actually had the required records. The preparer did not perform reasonably sufficient due diligence and therefore does not qualify for the reasonable cause and good faith exception to penalties.37

Relying on Expertise and Judgment Unfortunately, neither the Code nor the IRS provide tax preparers with a defined list of specific due diligence measures they can follow to always safeguard against preparer penalties. The Code and Regulations do, however, provide the good faith and reasonable cause exception. This exception serves as a due diligence exception to preparer penalties, giving tax preparers some insight into the level of due diligence the federal government expects from tax preparers. Ultimately, however, with due diligence, preparers should rely on their expert opinion and good judgment rather than trying to decipher the Code’s ambiguous rules and standards. As a general rule, if a preparer is unsure whether more due diligence is necessary, then more due diligence is necessary. The minimal cost of performing a little extra diligence is heavily outweighed by the potential benefit of precluding liability for costly preparer penalties. n

is a tax attorney with Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P. in Dallas, Texas. He can be reached at pbudd@meadowscollier.com.

Footnotes 1. I.R.C. § 6694(a).

15. Treas. Reg. § 1.6694-2(e)(3).

28. Id. (emphasis added).

2. Id.

16. Id.

29. Treas. Reg. § 1.6694-1(e)(2).

3. I.R.C. §§ 6694(f); 7701(a)(36).

17. Treas. Reg. § 1.6694-2(e)(4).

30. Treas. Reg. § 1.6694-1(e)(1).

4. See Treas. Reg. § 301.7701-15(b)(3)(i).

18. Id.

31. Id.

5. See I.R.C. § 6694(a).

19. Treas. Reg. § 1.6694-2(e)(5).

32. Treas. Reg. § 1.6694-1(e)(1).

6. I.R.C. § 6694(a)(3).

20. Id.

33. I.R.C. § 6695(g).

7. See I.R.C. § 6694(b)(2).

21. Treas. Reg. § 1.6694-2(e)(6).

8. Treas. Reg. § 1.6694-2(e).

22. Id.

34. Example based on the facts in Brockhouse v. United States, 749 F.2d 1248 (7th Cir. 1984).

9. Id.

23. Treas. Reg. § 1.6694-1(e).

10. Treas. Reg. § 1.6694-2(e)(1). 11. Id.

24. See supra Section II.A.2.b.; Treas. Reg. § 1.66942(e)(5); Treas. Reg. § 1.6694-1(e).

12. Treas. Reg. § 1.6694-2(e)(2).

25. Treas. Reg. § 1.6694-2(e)(5).

13. Id.

26. Id.

14. Id.

27. Treas. Reg. § 1.6694-1(e)(1).

Today’sCPA January/February 2018

35. Example based on the facts in Revenue Ruling 81-171. 36. Example based on the facts in Revenue Ruling 80-266. 37. Example based on the facts in Revenue Ruling 80-266.

COVER

The Texas Economy:

Looking Ahead

By M. Ray Perryman

exas has been a growth leader in the nation and, indeed, the world for a number of years. The state weathered the Great Recession and ensuing real estate crisis better than most parts of the United States, and was adding jobs at a notable pace even before the energy sector (a major export sector) began its recovery. While a significant downturn in oil surfaced after 2014, its effect was to slow down, but not interrupt, the pace of growth (gains of 165,000 jobs in 2015 and about 220,000 in 2016), rather than precipitate a recession as occurred with a similar oil price drop in the 1980s. Recently, the Texas economy has been adding jobs at a better than 250,000 per year rate. The number would have been even higher except for the effects of Hurricane Harvey and the Lone Star State is poised for relatively strong expansion over the next few years. Almost all major industrial sectors are expanding and that trend is likely to continue. One reason for the stateâ&#x20AC;&#x2122;s success is that the U.S. economy is performing quite well, with job gains at a relatively strong pace and falling unemployment. The stock market is up, consumer confidence is high and inflation remains in check. There are challenges to be dealt with, both domestic and international, but the underlying pattern is generally improving. In fact, the Federal Reserve (Fed) has decided the economy is strong enough to take the next step toward normalization of monetary policy, which is important for long-term prosperity. It is unlikely that the new Fed Chairman, Jerome Powell, will materially change the policy direction. The health of the national business complex is clearly of benefit to Texas. On the downside, the disruption caused by Hurricane Harvey will affect the performance of the Texas economy and, in particular, the Gulf Coast areas. A number of communities were devastated by the wind and flooding rains, and many are still recovering. In the short term, some industries will see an increase in activity (such as construction), but the long-term effects are decidedly negative. A full recovery of the effects of Hurricane Harvey for the economy is expected over time, with the pace To

being critically dependent on the level of federal and state resource commitments and the availability of a large construction workforce. Many business operations are already back to normal, though the human costs and emotional toll of the massive storm will remain with us much longer. Economic data began to reflect the effects of job losses due to the storms in September and statistics could still show some volatility through early 2018, particularly for the areas directly affected by Harvey. Even so, these twists and turns are not indicative of underlying performance. Another contributing factor to the stateâ&#x20AC;&#x2122;s economic expansion is recovery in energy. The rig count is currently averaging nearly 200 higher than a year ago. According to Baker Hughes, the Texas counts were averaging in the range of 440 through much of the fall of 2017. This additional activity is not only beneficial to the economies of major production regions such as the Permian Basin, but to businesses across the state, as well. Manufacturing is also a source of strength, employing more than 7 percent of Texans, paying high wages and producing hundreds of billions of dollars in goods for export each year. Texas has been adding jobs in manufacturing, even as other states lose them by the thousands. The mix of manufactured products is determined in part by geography and resources. Oil and natural gas, petrochemicals and agricultural products, for instance, are produced in Texas because of geology, climate and available land. Other manufactured products, however, stem from the stateâ&#x20AC;&#x2122;s strong base of research universities, and the technologies and discoveries they spin off, as well as the well-educated graduates they produce. Still other categories (such as automobile manufacturing) are here at least in part due to concerted efforts to bring them to Texas through proactive economic development, incentives at the state and local levels and a favorable business climate. Manufacturing businesses generate opportunities for a broad spectrum of other types of firms ranging continued on next page 29

COVER continued from previous page

Accolades for Texas Business The state has been recognized by: • Business Facilities magazine – Best Business Climate, Best Infrastructure, Installed Wind Power Capacity Leader, Wind Power Installations and Exports Leaders • Chief Executive magazine – where a survey of CEOs placed Texas at the top for business climate for the 13th consecutive year Texas also won Site Selection magazine’s Governor’s Cup – which goes to the state with the most major corporate location and expansion projects – five years in a row.

Effects of Hurricane Harvey The Perryman Group estimates that Hurricane Harvey will cause losses to the U.S. economy during the next few years of: • $151.1 billion in real gross domestic product (constant 2009 dollars) • $100.0 billion in real personal income • 1.1 million person-years of employment The bulk of the impact falls on Texas and Louisiana, with Texas seeing losses projected at $114.9 billion in real gross state product, $76.1 billion in real personal income and 804,100 job years. The effects will occur over several years and will be partially masked by other positive growth factors.

from suppliers of needed inputs to those providing business services. In addition, as employees of all of these companies spend their payroll dollars, further economic benefits ensue. All in all, the multiplier (or “ripple”) effects of goodsproducing business operations greatly magnify their importance to the state economy. In fact, according to an impact assessment by The Perryman Group, a typical manufacturing job leads to 3,778 additional jobs in the state, with some sectors (such as refining, which uses Texas oil) bringing much higher benefits. Viewed in this manner, manufacturing accounts for about 30 percent of Texas employment and an even larger proportion of gross product. Looking ahead, there are challenges with the potential to affect both short-term and long-term growth prospects. Over the short term, it will take time for the Gulf Coast region to return to normal after Harvey. From an economic perspective, long-term economic performance is unlikely to be harmed for the state or for the greater Houston area, though communities sustaining major wind damage (such as Rockport and Port Aransas) may struggle to recover. Longer-term challenges include: • ensuring adequate investment in infrastructure, • improving public education, • encouraging higher education and training for young Texans and • enhancing the preparedness of the workforce for the jobs of the future. Industries are shifting and jobs are changing, and the trend will continue. Machine learning and automation may eliminate the vast majority of positions in some occupations. Not only will these changes come in the form of robots in manufacturing facilities or self-driving trucks, but also in sophisticated software, which can reduce the need for highly trained persons ranging from accountants to attorneys to software developers who are doing repetitive tasks that machines can learn to do (thereby shrinking the need to hire humans). The transformation to online and self-checkout retail is also a major factor for lower-skilled workers. The fastest growing occupational categories will generally be those requiring relatively high levels of education or postsecondary nondegree awards. While the fastest growth doesn’t mean the largest numbers of new jobs given differences in the sizes of the categories, it is nonetheless an indication of an underlying shift. In fact, the occupations expected to expand the most in percentage terms are in the wind and solar energy sectors, although the number of actual positions is relatively small. The correlation between education and income, and the likelihood of having a job, are well documented and it is only going to intensify over time. Encouraging and facilitating educational attainment is essential to ongoing prosperity. Another requirement is more and better training and retraining for those in categories of occupations that are Today’sCPA

“JOBS THAT PAY WELL AND ARE ADDING SIGNIFICANT NUMBERS OF POSITIONS OVER THE NEXT 10 YEARS ARE CONCENTRATED IN FIELDS THAT REQUIRE MORE EDUCATION.”

shrinking to better prepare the affected workers for jobs that are available. Millions of Americans are looking for work and if they could be better equipped, they could fill some of the millions of jobs now available. Supporting existing public and private education and training programs is essential, and other ways to get people the skills they need should be explored. The U.S. Bureau of Labor Statistics (BLS) recently released projections for growth in jobs through 2026. These projections shed additional light on the underlying shifts in the way businesses are functioning, the economy is growing and the population is changing. For example: • Expansion in the U.S. labor force will be slow, as population growth rates decline. • The labor force participation rate is also projected to continue to fall, reaching 61 percent in 2026, down from almost 63 percent in 2016 and 67 percent at its peak in 2000. • The aging of the Baby Boomer generation will increase the share of workers age 55 and older. • The diversity of the workforce will rise. • By 2026, about one of every five workers will be of Hispanic origin. Looking at job growth by industry, health care and social assistance is expected to become the largest major sector by 2026. For example: • Almost four million jobs will be added (about one-third of all new jobs). • Health care support occupations (with growth of more than 23 percent) and health care practitioners and technical occupations (up more than 15 percent) are projected to be among the fastest growing occupational groups.

Dr. M. Ray Perryman

Today’sCPA January/February 2018

• These two occupational groups account for 14 of the 30 fastest growing occupations from 2016 to 2026 and are projected to contribute about one-fifth of all new jobs by 2026. The aging of the Baby Boomers, longer life expectancies and growing rates of chronic conditions are factors contributing to rising demand for health care services. Patterns in the latest projections indicate solid job growth across most industries and occupations. Jobs that pay well and are adding significant numbers of positions over the next 10 years are concentrated in fields that require more education. Some occupations that have paid well in the past will be shrinking in the future. Health care will continue to be a major source of new jobs, both at the upper and lower ends of the pay scale. The population and economy are changing, and projections of growth by occupation highlight the ongoing evolution. Of course, all of these expectations are subject to a great deal of uncertainty and typically the fastest-growing occupations a few years hence (in percentage terms) do not even exist today. Such is the dynamic nature of our technological future, with the primary lesson being that developing and enhancing high-level skills is essential to long-term career success. The better Texas prepares individuals, the better the economy will perform. Long-term economic performance hinges on adapting to the underlying changes in the population and workforce. The mix of industries and occupations is also evolving. The strength of the Texas economy will help with short-term issues, such as the recovery process from Hurricane Harvey and other difficulties the state business complex may face, as well as with long-term challenges, such as preparing for the needs of the future. Despite its obvious momentum and recent success, Texas faces notable long-term challenges. The tax structure is out of step with patterns in economic growth and is in need of a fundamental overall. Spending on infrastructure, despite some recent improvement, is woefully inadequate to meet future needs. The state is also underfunding education in the face of massive demographic shifts and an increasingly technological economy. A recent CNBC analysis ranks Texas first in workforce, but 34th in educational quality. Obviously, these incongruous findings cannot simultaneously exist for an extended period. All of that to say that Texas is very well positioned for nearterm expansion and the Lone Star State should continue to be a growth leader in the years to come. To do so, however, it must recognize and respond to some daunting realities in a thoughtful and realistic manner. Perhaps more than at any time in its long and colorful history, Texas controls its own destiny and has the capacity to secure prosperity for generations to come. n

is president and CEO of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.

FEATURE ARTICLE

Developing Trends in the Tax Accounting Profession and Alternative Career Options for Accountants

By Ellen Carstensen and Sonja Pippin

t’s no secret to CPAs that the accounting profession has changed drastically in the past 15 years. Increased regulation, changes to legislation and the technology boom – to name some examples – have impacted the way CPAs and other accounting professionals execute their jobs, as well as the knowledge required to complete their work. The purpose of this article is to summarize these changes and their impact on the industry. In addition, we provide information about accounting graduates and hiring. We conclude by exploring the most recent trends in more traditional, as well as non-traditional careers.

Developments in Electronic Tax Return Filing A major change in the tax accounting profession over the past 20 years has been the implementation of electronic tax return filing (e-filing). The Internal Revenue Service (IRS) e-file function was introduced in 1986 as a test when 25,000 returns were filed electronically. Between 1987 and 1990, the number of e-filed returns increased to 1.1 million as an increased number of IRS districts were phased in to the use of e-file. In 1990, the option to e-file was launched nationwide and 4.2 million returns were filed electronically.1 Since then, that number has increased and created greater efficiency and accuracy surrounding the tax filing process. Specifically, the error rate decreased to 1 percent with e-file as opposed to 20 percent for a paper return.1 From 2008 to 2014, approximately 33,306,000 more returns were e-filed. The biggest e-file jump during that period was between the 2009 and 2010 tax years in which the number of e-filed returns increased by 7.89 percent, equating to approximately 13.5 million returns. During this same time period, a Congressional provision was enacted that required firms that file more than 10 returns per year to e-file all returns. This rule was phased in during 2011 for the 2010 tax year and return preparers who filed 100 or more returns were required to e-file all returns. Beginning in 2012, this threshold decreased to 11 tax returns.2 Each year after the 2010 tax year, there has been a steady increase in e-filed returns (in total and as a percentage of total returns filed).3 Not surprisingly, this increase in electronic filing coincides with a decrease in returns filed by tax professionals. While professionally prepared e-file 32

returns decreased by 0.5 percent to 1 percent per year between 2009 and 2014, self-prepared e-file returns increased by 0.5 percent to 1.5 percent per year, which positively correlates with the increase of over two million visits to the IRS.gov website during the same period.4

Tax Preparation Software The increase in self-prepared returns can also be attributed to the wide variety of free or low-cost software programs that can be used online and have continuously improved during the last few years. Free File is the preparation software on the IRS website and this software is free to anyone earning less than $64,000.5 In addition to that, the IRS offers a Volunteer Income Tax Assistance (VITA) program in which IRS-certified volunteers prepare tax returns for free if the taxpayer earns $54,000 or less.6 According to Linda Green7, who has been a CPA for 21 years and has over 35 years of accounting experience, one of the biggest shifts in the tax accounting industry was the dawn of TurboTax and IRS preparation websites that have caused tax preparation for the professional to be elevated to a higher level of knowledge required to prepare tax returns. The existence of software developed to assist filers with simpler tax issues means that tax professionals continuously need to develop their skills and understanding of deeper, complex tax issues to stay relevant in the market. Tax Code and Regulations The knowledge required by CPAs is also constantly changing as the complex U.S. Tax Code is updated and amended. In December 2017, the Tax Cuts and Jobs Act was signed by President Donald Trump. The new law will impact all individual taxpayers beginning in the 2018 tax year, as it outlines changes to the standard deduction, personal exemption, child tax credit and the overall tax brackets, to name a few. Corporations will also be impacted in a variety of ways, including lowered tax brackets and changes to the dividends received deduction. Estates, trusts and various other entities will feel the impact of the changes, as well, once the filing season for the 2018 tax year begins.8 According to Green, some of the most recent impactful changes aside from the newly passed tax law have been the changes to Repairs and Maintenance regulations for businesses. The Repairs and Maintenance regulations, in short, detail which items and costs to capitalize, specifically regarding assets, repairs, and materials and supplies, as well as how to Today’sCPA

handle asset dispositions. Much of this is left up to interpretation and can vary based on subtle nuances and circumstances of the specific business or situation at hand, which has “caused the profession to go crazy with trying to understand the rules.”8 The Affordable Care Act (ACA), which took effect beginning in the 2014 tax year, was another major piece of legislation that impacted the tax accounting world on the business and individual preparation side. The ACA bill itself is over 2,000 pages;9 yet there are no clear-cut preparation guidelines for tax filers. The new tax bill passed in December further changes the way the ACA affects tax preparation. The law removes the individual mandate, which previously enforced a financial penalty on an individual’s tax return for failing to have adequate health coverage. The IRS is the enforcer of the Act, which means tax preparers are one step below, ensuring that clients are properly recording their health care information. With the tumultuous nature of the U.S. Government today, and the continued controversy surrounding ACA,10 it would not be surprising if the Act continued to change in the future, prolonging the learning period and keeping tax accountants busy with its implementation and compliance for the foreseeable future. The Protecting Americans Against Tax Hikes Act (PATH Act) of 2015 is also significant, because it addressed many tax extenders that have not been permanent in over a decade – such as the Child Tax Credit, the American Opportunity Tax Credit, spending limits for Section 179 property, and tax-free charitable donations from retirement accounts.11 The 233-page Act is made up of six Titles, two of which directly impact tax preparers. Under Title I, there were 56 sections, many of which reference the same extensions from previous years, but still contain a large number of relevant changes. Title III, Miscellaneous Provisions, also affects tax accountants, and this Title contains 37 sections. “The provisions are a mixed bag: some are principled, sound tax policy, while others are giveaways to narrow interests.12 These extenders do add predictability to the profession, enhancing accuracy and reducing risk of error, but legislation is virtually never final and is always subject to change.

Accounting and Non-Accounting Career Trends Although tax and financial accounting job markets ebb and flow with the economy in general, the profession is growing and students continue to recognize this. In 2012, there were over 240,000 students enrolled in accounting programs in the United States, and over 61,000 bachelor’s degrees and over 21,000 master’s degrees were awarded. In the same year, over 40,000 bachelor’s degree graduates and 23,000 master’s degree graduates were hired by CPA firms.13 According to AICPA, the discrepancy between degrees awarded and hiring numbers is due to the fact that some continued on in their education to earn a master’s or Ph.D. degree, or they entered an industry that was not tracked in the research, such as private industry or government. While tax and financial accounting is a relatively stable career choice, it is not recession proof and hiring did drop off noticeably in 2007.13 Still, an accounting degree is a great option for accounting graduates and can offer fairly high job security. Between 2014 and 2024, job growth for accountants and auditors is predicted to grow by 11 percent, or 142,400 jobs, which exceeds the 7 percent average growth prediction for all occupations.14 That said, not all accounting graduates want to follow the traditional public accounting career. Luckily, an accounting degree can afford a person Today’sCPA January/February 2018

Figure 1. Accounting Career Growth in Various Areas

many opportunities that may not be as readily available to other degree seekers. Tax and financial accountants are very valuable in business for a variety of reasons. Businesses’ main purpose is to maximize the benefits for owner and non-owner investors. Even nonprofit organizations need to place revenues as high priority to continue providing the services they were created to provide. Understanding how to make a profit, manage money and prepare taxes to best benefit a business’ financial situation are all concepts that accountants learn in school and throughout their careers. “Numbers have to be crunched, models have to be built, economics have to be there and the people who have to figure it out have to have a very solid knowledge of accounting,” commented David Eskenazy,15 a CPA who served on the board of directors for 16 years for Outerwall, the company that owned Coinstar and Redbox. Eskenazy suggests that accounting students put in the time at a public accounting firm right out of school to solidify a basic knowledge of business and an understanding of internal controls, which is invaluable in today’s highly regulated business world. According to Eskenazy, his first three years out of college at Peat Marwick Mitchell, now known as KPMG, allowed him to audit a variety of business types, which gave him a basic financial understanding of how a wide variety of businesses function. Additionally, experience at a public firm will always be valuable to have on your resume, as it adds instant credibility for professionals.15 A similar career path is that of a financial analyst who helps businesses and individuals make investment decisions and this occupation is expected to grow 12 percent – 32,300 jobs – between 2014 and 2024. Another option is a personal financial advisor who offers consulting services on a variety of issues, such as estate planning, college fund planning, mortgage issues and a multitude of topics that could include any financial matter a person or family encounters. This occupation is predicted to grow by 30 percent (or 73,900 jobs) from 2014 to 2024. Having a strong base of tax knowledge will greatly assist in this career path. In addition, a person with an accounting background could be a financial examiner, also known as a forensic accountant. Although Figure 1 suggests that this career makes up a small portion of the industry in relation to the other options, careers in financial examining are expected continued on next page 33

FEATURE ARTICLE continued from previous page to grow 10 percent from 2014 to 2024.14 Investigative skills, an eye for fraud and in-depth accounting knowledge are all put to use in the pursuit of a career in financial examining. Following this career can give rise to employment opportunities in public accounting firms, law firms and various government agencies, such as the IRS or the FBI. Post-secondary teaching is also a viable career path for someone with an accounting background. Last but certainly not least, the Bureau of Labor Statistics lists “Top Executive” as a possible career option for accountants.14 Figure 1 depicts growth in each career while presenting a visual comparison of total job numbers between each option. This underlines Eskenazy’s point that people who thoroughly understand business and accounting can perform almost any management function within a business, because those people have the knowledge to make complex decisions while keeping in mind the financial needs and capabilities of the business. Eskenazy currently serves as president of Merrill Gardens, a senior living community, where he manages a wide variety of people in operations, IT and human resources, to name a few, but he does not directly manage the accounting and finance side of the business. However, he pointed out that due to his strong accounting background, he can speak the “accounting language,” which makes communication between departments smooth and efficient.15 Additionally, many people think of CPAs as people who stare at a screen all day and do not interact with others. However, tax accountants

are required to speak with clients often, in order to provide the best service possible. Tax accounting becomes a customer service in this regard, Green commented, which can be extremely valuable in any type of service industry.7 It is also important to understand personality traits when considering career paths, because it can assist in determining which careers suit different people. Bertolini, Borgia and Siegel highlight how tax accountants have a general tendency to need greater social interaction than other types of accountants, but a slightly lower need than business professionals in general. By understanding social preferences, people can better determine which career to potentially pursue.16 Green also points out that CPAs are held to high ethical standards and an ethical mindset is invaluable in any business setting.7 It is important to be mindful of the constant changes in the accounting profession as a whole, in particular with regard to tax. Remaining ethical to clients includes having the most accurate and up-to-date knowledge to best serve them. This requires accounting professionals to continuously grow and learn, which often involves the evolution of the complex knowledge base. While continuing to pursue a greater depth of knowledge, accounting professionals should also be open to, and aware of, new opportunities that arise because an accounting degree and knowledge can afford so many different opportunities. n

Ellen Carstensen

earned a master’s degree from the University of Nevada Reno. She is an accountant at a hedge fund management firm, Anderson Growth Partners, and a Nevada CPA candidate. She can be reached at ellen.christine.carstensen@gmail.com.

Sonja Pippin, Ph.D., CPA

is an associate professor at the University of Nevada Reno, where she teaches taxation of business entities and financial accounting at the undergraduate and the graduate level. She can be contacted at sonjap@unr.edu.

References 1. IRS E-File: A History. (2011, June). IRS. Retrieved from https://www.irs.gov/uac/tax-stat 10. “Why is Obamacare so controversial?” (2014, March 28). BBC. Retrieved from http:// www.bbc.com/news/world-us-canada-24370967 2. Most Tax Return Preparers Must Use e-file. (n.d.). IRS. Retrieved from https://www.irs. gov/tax-professionals/e-file-providers-partners/most-tax-return-preparers-must-useirs-e-file

11. Greenburg, Scott. (2016, January 11). “Which Tax Extenders are Left?” Tax Foundation. Retrieved from http://taxfoundation.org/blog/which-tax-extenders-are-left

3. 2016 and Prior Year Filing Season Statistics. (n.d.). IRS. Retrieved from https://www.irs. 12. Greenburg, Scott. (2015, December 17). “The Twelve Most Important Provisions in the gov/uac/2016-and-prior-year-filing-season-statistics Latest Tax Bill.” Tax Foundation. Retrieved from.http://taxfoundation.org/blog/twelvemost-important-provisions-latest-tax-bill 4. U.S. and World Population Clock. (n.d.). United States Census Bureau. Retrieved from http://www.census.gov/popclock/ 5. Free File: Do Your Federal Taxes for Free. (n.d.). IRS. Retrieved from https://www.irs. gov/uac/free-file-do-your-federal-taxes-for-free

13. Baysden, Chris. (213, June 19). “Demand for accounting grads reaches all-time high.” Journal of Accountancy. Retrieved from http://www.journalofaccountancy.com/ news/2013/jun/20138181.html

6. Free Tax Return Preparation for Qualifying Taxpayers. (n.d.). IRS. Retrieved from https:// 14. Business and Financial Occupations. (n.d.). Bureau of Labor Statistics. Retrieved from http://www.bls.gov/ooh/business-and-financial/ www.irs.gov/individuals/free-tax-return-preparation-for-you-by-volunteers 15. Eskenazy, David. (2016, September). Semi-structured phone interview. Eskenazy is a 7. Green, Linda. (2016, September). Semi-structured interview with Linda Green, CPA. CPA and businessman, and he has had a very interesting career. He worked in public Author emailed questions to her and she responded with responses to that document. accounting for three years for the company now known as KPMG. He then gained Green earned her CPA certification in 1997 and has over 35 years of accounting experience in a variety of industries while working under a venture capitalist. He also experience. She has a wide variety of accounting experience, including bookkeeping, had the opportunity to serve 16 years on the board of directors of a company before tax preparation, auditing, QuickBooks consulting and training, consulting to small and after they went public and chaired the audit committee of the board of 12 of those businesses and nonprofit organizations regarding work flow and personnel issues, and years. His unique experiences, academic background and CPA certification make him she owned her own tax and bookkeeping business in Seattle, Wash. for many years. an extremely reputable source. 8. Danielle Kurtzleben and Arnie Seipel. (2017, December 20). “Trump Celebrates Legislative Win After Congress Passes $1.5 Trillion Tax Cut Bill.” npr. Retrieved from https://www. npr. 16. Michelle Bertolini, Carl Borgia, and Philip H. Siegel. (2010, March 1). “The Social Skill Preferences of Tax Professionals In CPA Firms: A FIRO-B Analysis.” Journal of Applied org/2017/12/20/572157392/gop-poised-for-tax-victory-after-a-brief-delay Business Research. 9. Compilation of Patient Protection and Affordable Care Act. (2010, May). Retrieved from https://www.hhs.gov/sites/default/files/ppacacon.pdf

Today’sCPA

TSCPA 2020

Texas Society of CPAs Strategic Plan

SCPA 2020 is a dynamic three-year plan we have created to take our organization into a vibrant future. The plan is the product of research, listening and thoughtprovoking conversations with members and volunteers from across the state. Our new vision – Empower Members to Lead and Succeed – succinctly sums up our most important charge. TSCPA is for you, our members, and helping you with success and growth is at the heart of all we do. We have four guiding principles that will shape our program and service development: Leverage & Lead Technology, Building Leaders,

Today’sCPA January/February 2018

Organizational Flexibility and Connecting Members & Resources. There are three pillars that our member service will be based upon and how we plan to deliver on our promise to you: Professional Excellence, Advocacy and Community & Connection. Key initiatives support each pillar of success. We’re confident that your engagement and support of the initiatives in TSCPA 2020 will enhance the value of your membership. TSCPA and our statewide network of 20 chapters will support you and serve with and for you representing the collective voice of 28,000 members. To learn more about TSCPA 2020, visit our website at www. TSCPA.org/TSCPA2020 or email us at TSCPA2020@tscpa.net. n

CPE ARTICLE

Tax Traps of

Inherited IRAs

By Brinn Serbanic, CPA, CFP® and Ellen Ygnacio, CPA

Curriculum: Tax Level: Intermediate Designed For: Tax practitioners, financial planners Objectives: To analyze the options available to beneficiaries of IRAs upon death of the account owner and present planning opportunities to avoid potential hazards. Key Topics: Inherited IRAs, no designated beneficiary rule and five-year payout method Prerequisites: None Advanced Preparation: None 36

Traditional and Roth individual retirement accounts (IRAs) are commonplace retirement vehicles, easy to set up and maintain, fairly simple to understand … that is, until the account holder passes away. At that point, the IRA falls into a world of confusing options, deadlines and potentially severe penalties. As trusted advisors, CPAs have a unique opportunity to assist heirs in navigating these tax traps to maximize the value of their inherited IRA. Today’sCPA

To cover the basics, traditional IRA accounts are generally funded with pre-tax dollars, the exception being when nondeductible contributions are made due to AGI limitations. The account grows tax-deferred, withdrawals are subject to income tax at ordinary rates and required minimum distributions (RMDs) begin at age 70 ½. If the required annual withdrawal is not made, the owner pays a stiff penalty of 50 percent of the required withdrawal not taken. In contrast, Roth IRA accounts are funded with after-tax dollars, grow tax-free, withdrawals are not subject to income tax and there are no minimum distributions required at 70 ½. Trap: A common misconception is that, upon death, IRA accounts follow a decedent’s will; instead, the IRA passes directly to the named beneficiary or beneficiaries on the account. The importance of naming a beneficiary (and secondary beneficiary) for each IRA cannot be understated. If there is no beneficiary designation on file at the owner’s death, the account may fall into the decedent’s estate, which at best, limits the ultimate inheritor’s options to the five-year payout method and at worst, also subjects the IRA to estate tax if the total estate value exceeds the federal exemption. Trap: The second major potential tax trap is not taking quick action. If an account holder was over 70 ½ at death and had not yet taken their RMD for the year, the beneficiary must withdraw the RMD before year-end or face a penalty of 50 percent of the required withdrawal amount. Thus, if the account owner dies late in the year without yet taking all of the annual RMD, the beneficiary may be hard pressed to first discover any and all IRA accounts that were held by the decedent and second, inform the IRA custodian of the account owner’s death and request the RMD payout before year-end. Note that an RMD is not required to be withdrawn from each and every IRA account; instead, the aggregate value of the IRAs can be used to determine the total required distribution and the RMD can be taken from one account. Trap: Timely action is also required of non-spouse beneficiaries who inherit an IRA from an account owner of any age. For both traditional and Roth IRAs, non-spouse beneficiaries must withdraw their RMD by Dec. 31 of the year following the decedent’s year of death. Therefore, if Junior inherits a Roth IRA from dad in November 2016, then Junior has a deadline of Dec. 31, 2017, for his first RMD unless he chooses the lump sum distribution or five-year payout.

Options Available Upon Inheritance Upon an IRA account owner’s death, the designated beneficiary must determine a course of action for the IRA. Four selections exist for IRAs upon inheritance; however, which of the four options are permitted depends on the type of IRA, spouse or non-spouse beneficiary, and the age of the account owner at death. Please see Table 1 to determine the routes offered in a particular situation. Below are the details of each path presented. 1. Lump sum distribution. Exactly as it sounds, the first option is available to all beneficiaries and consists of withdrawing Today’sCPA January/February 2018

the entire IRA account value at one time. There is no 10 percent early withdrawal penalty; however, the lump sum is fully taxable in the year of receipt and may bump the beneficiary into higher tax brackets, resulting in inefficient taxation of the inheritance and the loss of future taxdeferred growth in the account. 2. Five-year method. The beneficiary has five years to distribute all of the IRA asset value. The beneficiary can distribute assets at any time so long as the entire value is withdrawn by Dec. 31 of the 5th year after the account holder’s year of death. Extending the distribution out over five years can avoid the tax hit of a lump sum in one year and allows the value to grow within the five years; however, the beneficiary is losing the valuable tax-deferred (or tax-free in the case of a Roth) growth of stretching the IRA over a life expectancy. Trap: As previously noted, if a non-spouse beneficiary misses the RMD deadline of Dec. 31 of the year following the decedent’s year of death (for both traditional and Roth IRAs), then the beneficiary will have to either use the five-year method or pay the 50 percent penalty for the unclaimed distribution. Don’t always assume that avoiding the penalty is the better option; depending on the numbers, it may be wiser to pay the penalty for one missed RMD rather than empty the account in five years and lose the lifetime of accumulated tax-deferred growth. 3. Treat as beneficiary’s own IRA. Available only to spouses who are the sole beneficiary of the account, the spouse can transfer assets into their own existing IRA or set up a new IRA for themselves. Mathematically, this option produces the ideal result – avoids the initial tax hit of the first two options and ensures that the account continues to grow taxdeferred. The IRA is treated exactly as if it had always been the spouse’s and the usual rules apply: contributions can be made to the account until age 70 ½, distributions are required and generally calculated according to the beneficiary’s life expectancy, and the beneficiary spouse can withdraw money with no penalty after age 59 ½; however, before age 59 ½, the 10 percent early withdrawal penalty is imposed, with some exceptions allowable. Planning Point: If the spouse treats the IRA as their own, the account is also eligible for Roth conversion, if the spouse has significant charitable contribution carryovers, net operating losses or other tax attributes favorable to a conversion. There are a few situations that do not permit a spousal beneficiary to treat the IRA as their own. Rollover, SEP and SIMPLE IRAs cannot be transferred into a spouse’s own IRA account. In addition, if the IRA passed through the estate or a trust before being received by the surviving spouse, the spouse would not be able to roll over the IRA proceeds into their own account unless certain requirements are met. continued on next page 37

CPE ARTICLE continued from previous page Table 1. Options Available for Inherited IRAs Type of IRA:

Traditional IRA

Beneficiary:

Roth IRA Nonspouse

Spouse

Nonspouse

Under 70.5

Over 70.5

Under 70.5

Over 70.5

Any Age

1. Lump sum distribution

2. Five-year method

3. Treat as own IRA

4. Inherited IRA

Age of account owner at death: Options available:

X X

Inherited IRA RMDs required to start by: a. Dec. 31 of year following account owner’s year of death b. Later of (a) or Dec. 31 of the year the account owner would have been 70.5

Distributions calculated according to: a. Beneficiary life expectancy b. Longer of: beneficiary's life expectancy or decedent's remaining life expectancy

X X

4. Retitle as inherited IRA. The beneficiary transfers assets into an IRA that is initially set up as, or retitled to be, an inherited IRA. The inherited IRA is treated differently than if it were the beneficiary’s own; for instance, contributions cannot be made to the account. In addition, distributions from an inherited IRA are not subject to the 10 percent early withdrawal penalty regardless of the beneficiary’s age. This option is primarily used by non-spouse beneficiaries, who are permitted to stretch the required minimum distributions out over their life expectancy. Stretching the IRA over a beneficiary’s lifetime means smaller required withdrawals and slower depletion of the account, resulting in more tax-deferred growth compounding. In addition, reduced distribution income translates to a lower annual tax burden for the beneficiary. Trap: If an IRA account names multiple beneficiaries and assets are rolled into one inherited IRA for all, then RMDs are calculated based on the oldest beneficiary’s life expectancy. In order to maximize the stretch and slow depletion of the account, set up separate inherited IRAs for each beneficiary so that RMDs for each account are calculated based on the sole owner’s life expectancy. Planning Point: Generally, a spousal beneficiary would choose option three to treat the IRA as their own. However, 38

there are particular scenarios in which the spouse should weigh option four. Consider spousal beneficiary, Sarah, who is age 55. Perhaps an advisor recommends and executes the traditional option three to treat the account as her own. However, Sarah needs the money in the IRA for her annual support, so she plans to withdraw $60,000 each year from the account. Because Sarah is under age 59 ½ and the account is treated as her own, she is subject to the 10 percent early withdrawal penalty each year. The better option for a spousal beneficiary who is younger than age 59 ½ and requires the funds for support is option four – take the distributions as the beneficiary of the IRA, instead of as the owner, to avoid the early withdrawal penalty. Further, at any time, Sarah can elect to roll some or all of the funds from the inherited IRA to her own IRA, tax-free, so long as the withdrawal does not constitute the RMD for the year. The second scenario in which a spousal beneficiary should consider choosing option four is if the surviving spouse is older than the decedent. If the spouse were to treat the IRA as her own, she would be subject to RMDs earlier and the distributions would be larger in amount as RMDs increase with age.

No-Designated Beneficiary Rule Arguably the worst case scenario for an IRA is to end up in the decedent’s estate, which is the default for IRA accounts with no named beneficiaries. As previously discussed, the ultimate beneficiaries are then limited to the five-year payout option and, if the decedent’s estate value exceeds the exemption, the IRA may be subject to estate tax. Planning Point: If estate tax is paid on the IRA account value, the ultimate beneficiary is entitled to an income in respect of decedent (IRD) deduction for the estate tax paid, which is apportioned at each IRA distribution. The deduction is taken as a miscellaneous itemized deduction on the beneficiary’s individual income tax return. Naming a beneficiary for each and every IRA account owned is the first, and most important, step in IRA planning. IRA beneficiaries may include charities, entities, trusts or minor children, each of which creates additional complexity. Charities, entities and certain trusts have no life expectancy and thus are not considered qualified designated beneficiaries. If even one beneficiary of the IRA is not an individual, the IRA generally falls into the no-designated beneficiary rule, which does not allow the account’s value to be stretched out over a beneficiary’s lifetime. This rule requires either the: • Five-year payout option, if the account owner died before RMDs began at age 70 ½, or • Distributions to be made over the decedent’s remaining life expectancy, if the account owner died after age 70 ½. Trap: IRAs with charitable or entity beneficiaries can circumvent the no-designated beneficiary rule if one of two Today’sCPA

possible exceptions are met. The first exception is that a separate IRA is set up for each respective beneficiary and thus the charity has their own account, established by Dec. 31 of the year after the account owner’s year of death. The second exception is that the charity’s entire share of the IRA is paid out by Sept. 30 in the year after the owner’s year of death. Either option will permit the remaining non-entity beneficiaries to use the stretch payout option based on their own life expectancy. If an account owner names a minor child as IRA beneficiary, then they must also be careful to designate a custodian. A minor child is prohibited from inheriting an IRA outright, and without a designated custodian, the IRA will wind up in the decedent’s estate. A second option is to create and name a trust as the recipient of an IRA for the benefit of a minor child. A trust can and should be used if an intended beneficiary is a spendthrift, involved in litigation, likely to experience divorce or is employed in a profession with probable potential for being sued. However, beware that the trust must meet specific criteria in Reg § 1.401(a)(9)-4, Q-5 to qualify as an IRA inheritance trust. The IRA custodian can then “see through” the trust to the ultimate beneficiaries and thus avoid the limited distribution options of the no-designated beneficiary rule. Trap: The trust must be a valid trust under state law, irrevocable and the underlying beneficiaries must be eligible designated beneficiaries to qualify. Lastly, upon death of the account owner, the trustee should send a copy of the trust agreement to the IRA custodian by Oct. 31 of the year after the account owner’s year of death. While solely an administrative requirement, if the deadline and other three criteria are not met, the trust will fail see through treatment and be subject to the no-designated beneficiary rule. Lastly, in selecting the options available for the account after the original owner’s death, consider the beneficiary’s financial status. As a general rule in bankruptcy cases, IRAs qualify for a full exemption and thus are entirely protected from creditors. Therefore, a spouse who chooses to treat the IRA as their own will receive full bankruptcy protection on the account. However, the Supreme Court has held that inherited IRAs do not qualify for this bankruptcy exemption, leaving beneficiaries who choose option four vulnerable to creditors.

Roth IRAs The four routes apply to Roth IRAs, as well, but one additional rule applies to Roth IRA distributions. Distributions from a Roth are typically tax-free as long as the owner is over age

59 ½ and has held the account for more than five years. If the account owner does not meet these requirements, then earnings distributed are subject to income tax and a 10 percent penalty for early withdrawals unless one of several exceptions apply. This rule applies to inherited Roth IRAs as well – prior to age 59 ½ and the five-year holding period being met, earnings will be taxable upon distribution. The five-year holding period starts the first day of the first tax year in which the original account holder contributed money to the Roth; thus, the decedent’s holding period counts toward the five years. However, note that distributions from the account are first treated as coming from basis, then earnings; thus, so long as the beneficiary does not distribute more than the decedent contributed, there is no taxable income regardless of the age or holding period requirements. Roth IRAs do not require minimum distributions after age 70 ½, which is a significant estate planning tool. By foregoing distributions, the Roth owner allows the account to compound a lifetime of tax-free growth for future beneficiaries. Once the Roth is inherited by a beneficiary, required minimum distributions must begin. If the beneficiary is a spouse, RMDs must start by the later of Dec. 31 of the year following the account owner’s year of death or Dec. 31 of the year the account owner would have been age 70 ½. If the beneficiary is a non-spouse, RMDs must begin by the former.

Traditional IRAs with Basis Many taxpayers have basis in their traditional IRA from nondeductible contributions. If a beneficiary inherits a traditional IRA with basis, the basis remains with the IRA. A surviving spouse, upon electing to treat the IRA as their own, can even combine the inherited basis with any in their own IRA for purposes of calculating the taxable portion of distributions. However, a non-spouse beneficiary or spouse who elects option four cannot combine the basis with their own; thus, when distributions are taken from both the beneficiary’s own IRA and the inherited IRA, separate Forms 8606 should be completed to determine the taxable and nontaxable portions. Final Thoughts The wealth in an IRA is the culmination of many years of the account owner’s hard work and planning and can be a potentially life-changing inheritance for a beneficiary. In our role as trusted CPA advisors, the goal must be to help our clients navigate the complex world of inherited IRAs and avoid the tax traps waiting to catch the ill-advised. n

Brinn Serbanic, CPA, CFP®

is a senior tax manager at BKD CPAs & Advisors in Waco, Texas, and may be reached at bserbanic@bkd.com.

Ellen Ygnacio, CPA

is a senior associate at BKD CPAs & Advisors in Waco, Texas, and may be reached at eygnacio@bkd.com.

Today’sCPA January/February 2018

CPE QUIZ

By Brinn Serbanic, CPA, CFP® and Ellen Ygnacio, CPA

Tax Traps of Inherited IRAs 1 Which of the following is true regarding the treatment of estate tax paid on an IRA account value?

Charlie, age 30. The children decide the best option is to retitle the account as one inherited IRA for their benefit. How will the required minimum distributions be calculated?

A. The estate tax paid is not deductible. B. The estate tax paid is deductible as a miscellaneous itemized deduction on the beneficiary’s tax return. C. The estate tax paid is deductible as an investment expense. D. The estate tax paid is deductible on the decedent’s final income tax return.

2 When Anita’s uncle dies at the age of 68, which option for his traditional IRA is not available to Anita as his beneficiary? A. Lump sum distribution B. Inherited IRA

She does not want to choose the lump sum distribution or five-year payout option. Instead, she would prefer to roll the balance into an inherited IRA. By what date must Sarah withdraw her first required minimum distribution? C. July 31, 2018 D. Dec. 31, 2018

IRA equally to her son, Brandon, and First Baptist Church. Under the no designated beneficiary rule, what is the required payout option assuming that the IRA stays in one account for the benefit of both beneficiaries and the charity’s share was not paid out by September 30, 2019? A. B. C. D.

Lump sum distribution Five-year payout Distributions to be made over the decedent’s remaining life expectancy Distributions to be made over Brandon’s life expectancy

9 Which of the following is an effective method of leaving an IRA to a minor child?

4 Fred dies at the age of 51 and leaves his traditional IRA to his brother, Frank. Frank decides to roll the balance into an inherited IRA. How will distributions from the account be calculated? A. According to Frank’s life expectancy B. According to Fred’s remaining life expectancy C. The longer of (a) or (b) D. The account must be paid out within five years of the decedent’s death

A. Name an IRA inheritance trust for the benefit of the minor as the IRA beneficiary B. Name the minor child as the account beneficiary C. Do not name a beneficiary for the account and allow it to pass to the child through the estate D. List the child as a beneficiary contingent upon attainment of age 18

10 Jason’s wife, Pam, passed away suddenly at the age of 40 in 2018. Jason was the named beneficiary of her substantial Roth IRA account. Jason decides to title the account as an inherited IRA rather than treat it as his own account. By what date is Jason required to start his required minimum distributions?

5 Which of the following IRAs are eligible to be rolled over into a spousal beneficiary’s own IRA account? A. Rollover IRA B. Traditional IRA

A. According to Whitney’s remaining life expectancy B. According to Brenda’s life expectancy C. According to the longer of Whitney’s remaining life expectancy or Charlie’s life expectancy D. According to Charlie’s life expectancy

8 Amy passes away in 2018 at the age of 57 and leaves her traditional

C. Treat as her own IRA D. Automatic five-year method

3 Sarah inherits a traditional IRA from her father upon his death in July 2017.

A. RMDs deferred until Sarah reaches age 70.5 B. Dec. 31, 2017

7 Whitney dies and leaves her IRA to her two children, Brenda, age 20, and

C. SEP IRA D. SIMPLE IRA

6 Bobby inherits an IRA from his mother and decides to roll it into an inherited IRA. Which of the following are permissible in an inherited IRA?

A. B. C. D.

Dec. 31 of the year that Pam would have turned 70.5 Dec. 31, 2019 Dec. 31 of the year after Jason turns 70.5 Later of (a) or (b)

A. Bobby can make contributions to the account until he turns 70.5 years old. B. Bobby can defer required minimum distributions until he is age 70.5 years old. C. Bobby can take withdrawals not subject to the 10 percent penalty even though he is under age 59.5. D. Bobby’s distributions avoid income tax after age 59.5. Today’s CPA offers the self-study exam above for readers to earn one hour of continuing professional education credit. The questions are based on technical information from the preceding article.

Please mail the test (photocopies accepted) along with your check to: Today’s CPA; Self-Study Exam: TSCPA CPE Foundation Inc.; 14651 Dallas Parkway, Suite 700; Dallas, Texas 75254-7408. TSBPA Registered Sponsor #260

Mail the completed test by Feb. 28, 2018, to TSCPA for grading.

Name Company/Firm Address (Where certificate should be mailed)

If you score 70 or better, you will receive a certificate verifying you have earned one hour of CPE credit – granted as of the date the test arrived in the TSCPA office – in accordance with the rules of the Texas State Board of Public Accountancy (TSBPA). If you score below 70, you will receive a letter with your grade. The answers for this exam will be posted in the next issue of Today’s CPA.

To receive your CPE certificate by email, please provide a valid email address for processing.

City/State/ZIP Email Address: Make checks payable to The Texas Society of CPAs ❑ $15 (TSCPA Member) ❑ $20 (Non-Member) Signature TSCPA Membership No:

Answers to last issue’s self-study exam: 1. C 2. A 3. C 4. B 5. D 6. B 7. C 8. B 9. D 10. C 40

Today’sCPA

TSCPA CPE COURSE CALENDAR

Mark Your Calendar – February and March CPE Courses

For more information, number of CPE credit hours and to register, go to the CPE section of the website at tscpa.org or call the TSCPA staff at 800-428-0272 (972-687-8500 in Dallas) for assistance. Course

Date

City

Advanced Texas Franchise Tax Workshop

February 9

Beaumont

Analytics and Big Data for Accountants

February 12

Dallas

Annual Update for Controllers

February 13

Dallas

U.S. GAAP: Review for Business & Industry

February 15

Dallas

Analytics and Big Data for Accountants

February 15

Austin

Advanced Controller and CFO Skills

February 16

Dallas

Annual Update for Controllers

February 16

Austin

Annual Update for Controllers

February 20

Houston

Analytics and Big Data for Accountants

February 21

Houston

Personal and Professional Ethics for Texas CPAs

February 21

Austin

Personal and Professional Ethics for Texas CPAs

February 22

Dallas

U.S. GAAP: Review for Business & Industry

February 22

Houston

Employment Law Update: Key Risks and Recent Trends

February 23

Corpus Christi

Advanced Controller and CFO Skills

February 23

Houston

Personal and Professional Ethics for Texas CPAs

February 23

Houston

LLC and Partnership Tax Planning Strategies

March 2

Houston

Personal and Professional Ethics for Texas CPAs

March 14

Dallas

Personal and Professional Ethics for Texas CPAs

March 20

San Antonio

CPE Value Conference

March 21

Houston

Personal and Professional Ethics for Texas CPAs

March 22

Houston

In December 2017, President Donald Trump signed the Tax Cuts and Jobs Act. It is the most extensive rewrite of the U.S. tax code in more than 30 years. TSCPA is your resource for education on the new law. We have live programs scheduled across the state to provide you with the critical knowledge, strategies and techniques you need. Please see page 11 of this Today’s CPA for a listing of upcoming live programs. There are also various web offerings available, so be sure to check our online CPE catalog at tscpa.org for more details and find a course that’s best for you. n Today’sCPA January/February 2018

CLASSIFIEDS To place a classified ad, email ddeakins@tscpa.net Positions Available

Available Through Accounting Practice Sales. Call 1-800-397-0249

Accountant - Bragg & Davison, Dalhart, TX. BBA in accounting or business. Small public firm with good work environment. QuickBooks and Microsoft Office experience a plus. Retirement plan, health and life insurance. Fax/email resume to 806-244-7202 or bdcpa@xit.net.

$398,000 gross. Austin CPA firm. 72% tax (77% ind., 19% bus., 5% other); 28% accounting services, staff in place, cash flow 54%, growing community. TXC1061

Rapidly growing CPA firm located in the expanding area of southwest Austin wants to hire a tax manager for tax season 2018. Applicant must have 7 to 10 years of experience in review of tax returns, tax planning and non-audit financial reporting engagements. The candidate must be a CPA with a history of proven problem solving. If the candidate is successful at performing all duties and responsibilities during tax season, retirement minded owner wants candidate to continue managing daily operation with an option to purchase firm after a period of proven success. Please respond with a detailed resume and salary history. Reply to austintaxprofessional@gmail.com.

Practices For Sale ACCOUNTING BROKER ACQUISITION GROUP 800-419-1223 X101 Accountingbroker.com Maximize Value When You Sell Your Firm Sole Practitioner - $140,000 gross, 80% tax, 20% audit, part time assistant available. Write at 2223 South Second Place, Lamesa, Texas 79331. Sole practitioner has 40-year old, Houston, TX tax practice for sale with $200,000 per year in annual billings. Principals only please. Respond to: File Box #6015, Attn: DeLynn Deakins, Texas Society of CPAs, 14651 Dallas Parkway, Suite 700, Dallas, TX 75254. ACCOUNTING BIZ BROKERS offers the following listings for sale: New: S Central gross $1.877M Plano Accounting & Bookkeeping Firm, gross $220k (Sale Pending) Irving Tax Practice, gross $510k Bryan-College Station area CPA firm, gross $635k West of Katy CPA firm, gross $250k Greater Austin area CPA firm, gross $115k St. Thomas, Virgin Islands CPA firm, gross $75k Contact Kathy Brents, CPA, CBI Office 866-260-2793, Cell 501-514-4928 Kathy@AccountingBizBrokers.com Visit us at www.AccountingBizBrokers.com Member of the Texas Society of CPAs Member of the Texas Association of Business Brokers Texas Practices Currently Available Through Accounting Practice Sales: North Americaâ&#x20AC;&#x2122;s Leader in Practice Sales Toll Free 1-800-397-0249 See full listing details and inquire/register for free at www.APS.net. 42

$138,000 gross. Austin tax firm. 99% tax (73% individual; 22% business; 5% other); 1% quarterly write-up, 65% cash flow, primed for growth. TXC1062 $500,000 gross. San Antonio metro area tax/audit firm. 86% tax (58% individual; 28% business; 14% other); 10% audits; 4% compilation/reviews, 59% cash flow. TXC1063 $48,000 gross. East Ft. Worth tax firm. Individual and business client base offers opportunity for expansion of services and growth through referrals. TXN1390 $100,000 gross. Weatherford CPA firm. Tax (90%), accounting/ bkkpg (10%), loyal client base, experienced staff in place. TXN1391 $193,000 gross. Allen CPA firm. 90% derived from monthly bkkpg and accounting services, year-round cash flow, quality client base. TXN1419 $380,000 gross. Wood Co. CPA firm. 78% tax, 22% accounting, good fee structure and knowledgeable staff in place, well positioned for additional growth. TXN1436 $656,000 gross. North Dallas CPA firm. 65% tax, 35% accounting, strong fee structure produces cash flow around 50%, knowledgeable staff in place. TXN1446 $199,000 gross. E. TX (near I-30) CPA firm. 27% tax, 27% consulting, 33% audits/reviews, 13% bkkpg/payroll, seller available for extended transition. TXN1447 $290,000 gross. E/SE Texas CPA firm. Primarily tax (70%), highquality clientele, solid fee structure, turn-key opportunity. TXN1451 $900,000 gross. Dallas area tax/consulting firm. Strong fees, minimal overhead, excellent cash flow over 70%, tenured staff in place, desirable location. TXN1461 $366,000 gross. NW Plano CPA firm. Monthly services (31%), annual accounting (24%), tax/misc. (38%), strong fee structure, cash flow to owner over 60%, great starter practice/reasonably portable. TXN1462 $195,500 gross. Mesquite CPA firm. Tax (62%), accounting (34%), misc. (4%), loyal client base, turn-key opportunity. TXN1463 $138,000 gross. NE Dallas CPA firm. Primarily tax work, highquality client base, excellent cash flow around 90%, desirable area. TXN1464 $69,000 gross. Murphy, Wylie and Sachse area CPA firm. Primarily tax (70%), accounting (20%), QB/payroll (10%), solid fee structure, cash flow over 65%. TXN1465 $360,000 gross. Champion Forest area CPA firm. Tax (25%), accounting/bkkpg (75%), knowledgeable staff, strong growth in recent years. TXS1191 Todayâ&#x20AC;&#x2122;sCPA

$94,000 gross. Columbia-Sweeny-Lake Jackson-Brazoria area tax firm. Tax 96%, 4% bkkpg, staff and owner available for extended transition. TXS1193 $780,000 gross. SW Houston CPA firm. Tax (42%), accntng (35%), audit (20%), other (3%), high-net-worth clients, strong staff in place to assist with transition. TXS1201 $145,000 gross. NW Harris Co. CPA firm. Strictly a tax (20% individual and 80% businesses), employee in place if needed, strong billing rates. TXS1202 $226,000 gross. Brazos Valley Tax and Acctng firm. Tax (72%), acctng (28%), staff in place if needed, primed for continued growth, portable to nearby firm. TXS1204 $170,000 gross. W. Houston CPA firm. Tax (63%), accounting (5%), one audit client (15%), financial planning (17%), great location, solid billing rates. TXS1206 $129,071 gross. Midland, TX CPA firm. Tax 90% (45% ind./55% bus.), mthly bkkpg 10%, cash flow 76%, portable, no employees but seller to help with transition. TXW1021 ACCOUNTING PRACTICE SALES For more information, call toll free 1-800-397-0249 See full listing details and inquire/register for free at www.APS.net.

Practices Sought Accounting Broker Acquisition Group “Maximize Value When You Sell Your Firm” You Sell Your CPA Firm Only Once! Free Report: “Discover the 12 Fatal Errors You Must Avoid When You Sell Your Firm!” Purchase • Sale • Merger Texas CPA Practices Our M&A Brokers Are 100% “Ex-Big Four” CPAs! Call or email now for Free Report 800-419-1223 X101 maximizevalue@accountingbroker.com accountingbroker.com MERGER OR PURCHASE OF CPA FIRM Seeking CPA, preferably with an existing small practice or clientele, to merge with my established practice. We have 30 years of success and are capable of growing substantially for the right person. The intention is to transfer or sale existing practice in the future. We work with small businesses that need tax, accounting and consulting services. We do not perform audits or reviews. Existing Fort Worth office with space to grow for right person. Depending on situation, expenses may be covered. Email to fw.cpa.ad@gmail.com.

Today’sCPA January/February 2018

SEEKING CPA FIRM SELLERS - ACCOUNTING BIZ BROKERS has been selling CPA firms for over 13 years and we know your market. Selling your firm is complex. We can simplify the process and help you get the best results! We have a large database of active buyers ready to purchase. Our “Six Steps to Success” process for selling your firm includes a personalized, confidential approach to bring you the “win-win” deal you are looking for. Our brokers are Certified Business Intermediaries (CBI) specializing in the sale of CPA firms. We are here to assist you in navigating the entire sales process – from marketing to negotiating, to closing and successfully transitioning the firm. Contact us TODAY to receive a free market analysis! Kathy Brents, CPA, CBI Office 866-260-2793 Cell 501-514-4928 Kathy@AccountingBizBrokers.com Visit us at www.AccountingBizBrokers.com Member of the Texas Society of CPAs Member of the Texas Association of Business Bankers BUYING OR SELLING? First talk with Texas CPAs who have the experience and knowledge to help with this big step. We know your concerns and what you are looking for. We can help with negotiations, details, financing, etc. Know your options. Visit www.APS.net for more information and current listings. Or call toll-free 800-397-0249. Confidential, no-obligation. We aren’t just a listing service. We work hard for you to obtain a professional and fair deal. ACCOUNTING PRACTICE SALES, INC. North America’s Leader in Practice Sales

Miscellaneous Do you have questions about sales tax? Taxability issues? Audit defense? Refunds? Voluntary disclosure? Let us be a resource for your firm and your clients. Our owner is a CPA with a BBA in Accounting and Master of Science in Taxation. He spent 10 years in public accounting, working for both national and large, local CPA firms prior to forming Sales Tax Specialists of Texas in 2005. Feel free to contact us with any questions. Stephen Hanebutt, CPA Sales Tax Specialists of Texas This firm is not a CPA firm 972-422-4530, shanebutt@salestaxtexas.com Michael J. Robertson, CPA Texas Sales Tax Solutions Need a specialist in Texas Sales Tax? Former Comptroller of Public Accounts - Audit Group Supervisor assisting accounting professionals with sales tax audits and client compliance issues. Is your client overpaying Texas sales tax? Call 817-478-5788 x12 Texas Sales Tax Solutions n

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