Today's CPA Jan/Feb 2015 by The Warren Group

Todayâ&#x20AC;&#x2122;sCPA JAN/FEB 2015

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

Perfect

Storm Has the Tide Turned Against Offshore Tax Evasion?

To Defer or Not to Defer: Considering Your Spouse in Planning Social Security Benefits Buying or Selling a CPA Practice CPE: Net Investment Income Tax and Planning Strategies

Also: Operation Taxpayer Assistance: Chapters Give Back in 2014

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CONTENTS

CHAIRMAN Mark Lee, CPA

VOLUME 42, NUMBER 4 JANUARY/FEBRUARY 2015

EXECUTIVE DIRECTOR/CEO John Sharbaugh, CAE

EDITORIAL BOARD CHAIRMAN Winford Paschall, CPA

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

TECHNICAL EDITOR C. William Thomas, CPA, Ph.D. Bill_Thomas@baylor.edu

COLUMN EDITORS Greta P. Hicks, CPA Mano Mahadeva, CPA, MBA C. William (Bill) Thomas, CPA, Ph.D.

WEB EDITOR Wayne Hardin whardin@tscpa.net

CONTRIBUTORS Ali Allie; Melinda Bentley; Rosa Castillo; Jerry Cross, CPA; Anne Davis, ABC; Donna Fritz; Wayne Hardin; Chrissy Jones, AICPA; Rhonda Ledbetter; Craig Nauta; Catherine Raffetto; Patty Wyatt

DIRECTOR, MARKETING & COMMUNICATIONS Janet Overton CLASSIFIED Donna Fritz Texas Society of CPAs 14651 Dallas Parkway, Suite 700 Dallas, Texas 75254-7408 972-687-8501 dfritz@tscpa.net

Editorial Board Arthur Agulnek, CPA-Dallas; Kristan Allen Crapps, CPA-Houston; James Danford, CPA-Fort Worth; Melissa Frazier, CPA-Houston; Greta Hicks, CPAHouston; Baria Jaroudi, CPA-Houston; Tony Katz, CPA-Dallas; Jeffrey Liggitt, CPA-Dallas; Mano Mahadeva, CPA-Dallas; Alyssa Martin; CPA-Dallas; Dawne Meijer, CPA-Houston; Winford Paschall, CPA-Fort Worth; Marshall Pitman, CPA-San Antonio; Mattie Porter, CPA-Houston; Kamala Raghavan, CPA-Houston; Barbara Scofield, CPA-Permian Basin; Brinn Serbanic, CPA-Central Texas.

Design/Production/Advertising

cover story 24 The Perfect Storm society features 14 Spotlight on CPAs Texas Bound 22 Capitol Interest The 84th Texas Legislature Convenes technical articles 30 To Defer or Not to Defer: Considering Your Spouse in Planning Social Security Benefits 34 Buying or Selling a CPA Practice 38 CPE: Net Investment Income Tax and Planning Strategies columns 4 Chairman’s and Executive Director’s Message TSCPA’s Tax-Related Resources and Advocacy 6 Tax Topics Local Lodging Deductible … Maybe 7 Business Perspectives The Benefits Dilemma 8 Accounting & Auditing SSARS 21: Clarified Accounting and Review Services Standard 9 Tech Issues Benefits of Embracing Technology to Empower Your Firm 10 Chapters Operation Taxpayer Assistance departments 16 Take Note 46 Classifieds

The Warren Group thewarrengroup.com custompubs@thewarrengroup.com

© 2015, 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 AND EXECUTIVE DIRECTOR’S MESSAGE

TSCPA’s Tax-Related Resources and Advocacy

By Mark Lee | 2014-2015 TSCPA Chairman and John Sharbaugh, CAE | TSCPA Executive Director/CEO

s we begin 2015, the new year brings a new tax season. The past year saw a number of developing tax issues. The Internal Revenue Service (IRS) continued to provide new guidance on the Patient Protection and Affordable Care Act and its application to individuals and businesses. Other issues included final and proposed regulations for the net investment income tax (NIIT), new rules for disclosure and account reporting related to the Foreign Account Tax Compliance Act (FATCA), continued occurrences of taxpayer identity theft, new individual retirement account (IRA) rollover requirements and more. In addition, the 2015 Texas legislative session, which begins on Jan. 13, 2015, could bring new developments in state tax issues this year, including changes to the franchise tax. TSCPA provides a number of valuable resources to keep you informed during tax season and throughout the year. For the latest updates, be sure to read your weekly electronic Viewpoint newsletter and visit TSCPA’s Federal Tax Policy blog at tscpafederal.typepad.com/blog. TSCPA’s Tax Issues e-newsletter is a source of important information and commentary. The e-newsletter is sent monthly and is free for members. To subscribe, contact TSCPA’s Patty Wyatt at pwyatt@tscpa.net. The Tax Issues Community on the website at tscpa.org is a hub for information and links to tax-related documents. In the federal information section of the community, you’ll find links to IRS material, directories, publications and tax articles. In the online resources section of the community, you can access IRS forms and publications; data on electronic filing; small business resources; instruction for employees; IRS contact lists; facts about abusive tax scams; resources for specific communities, such as corporations, international businesses and specific industries; and information on other relevant topics. Keep up to date during tax season through the news alerts that are posted in the community. There is also a link to register for TSCPA’s tax seminars, as well as links to AICPA’s Tax Center website and past editions of the Tax Topics column, written by Greta Hicks, CPAHouston, for Today’s CPA magazine. To visit the community, go to

TSCPA’s website at tscpa.org. Under Resource Center, scroll down to Member Communities, select Tax Issues, and log in as a member.

Mark Lee

John Sharbaugh

can be contacted at Mark.Lee@aglife.com.

Protecting the CPA Designation Individuals who have worked hard to earn and keep the CPA designation want it to be protected. To that end, TSCPA’s regulatory and political advocacy efforts create opportunities for dialogue between CPAs, legislators and accounting standards-setting bodies. The Federal Tax Policy Committee provides feedback to regulators on actual and proposed federal tax legislation, regulations and administrative pronouncements; the Relations with the IRS Committee maintains communications between TSCPA and the IRS to exchange ideas and information on topics related to the administration of federal tax laws and regulations. In November, the committees sent a joint letter to the leadership of the Senate and House Appropriations Committees urging support for the IRS’s budget at a level to properly fund taxpayer services. The Tax Analysts organization used this letter in an issue of its online publication Tax Notes. Other Federal Tax Policy Committee activities included issuing comments to the IRS on virtual currency guidance, proposed regulations related to the treatment of partnership liabilities under Section 752, proposed NIIT regulations regarding charitable remainder trusts under Section 1.1411-3(d)(3) and proposed NIIT regulations regarding material participation of estates and trusts under Section 469. In addition, TSCPA joined with AICPA and other state societies to urge IRS Commissioner John Koskinen to consider alleviating unnecessary burden that small businesses face with regard to repair regulations. TSCPA also sent a letter to leaders of the U.S. Senate Finance and House Ways and Means Committees urging immediate congressional action on expired and expiring federal tax provisions to provide certainty and fairness for taxpayers. The Society expressed that failure to act on tax extenders would likely delay 2014 tax filings, and the letter focused on four extenders of particular importance to the growth of the economy and the fairness of our federal tax system. At press time, Congress was working to renew expired tax provisions. TSCPA will continue to keep you informed on important tax issues. We encourage you to take advantage of the information, updates and resources that TSCPA provides to members. They can be useful tools for your practice as the new tax season begins, as well as during the rest of the year. n can be contacted at jsharbaugh@tscpa.net. Today’sCPA

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YOU’RE A CPA.

TAX TOPICS

Local Lodging Deductible … Maybe

By Greta Hicks, CPA | Column Editor

o be deductible, lodging is typically required to be out of town or away from home. On Oct. 20, 2014, the Internal Revenue Service (IRS) released the final regulations § 1.162–32 and made the announcement in T.D. 9696, IRB 2014-43. Although it is effective for tax years paid or incurred on or after Oct. 1, 2014, the T.D. did say any taxpayer may apply these regulations for open tax years ending before Oct. 1, 2014.

Local lodging expenses will be treated as ordinary and necessary business expenses if: (1) The lodging is necessary for the individual to participate fully in, or be available for, a bona fide business meeting, conference, training activity or other business function; (2) The lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter; (3) If the individual is an employee, the employee’s employer requires the employee to remain at the activity or function overnight; and (4) The lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation or benefit. Greta Hicks, CPA 6

If the local lodging expenses meet all of the above necessary requirements, the expenses will be a tax-free fringe benefit to the employee and a deductible expense to the employer. The key requirement is that the lodging must be for the benefit of the employer and a requirement of the employer. The IRS anticipates that the types of local lodging expenses that would be incurred are for bona fide business meetings, conferences, training activities and other business functions. Notice that none of the examples are related to moving expenses or entertainment-related expenses. Examples in the regulations: 1. An employer conducts a training session for its employees at a hotel near the employer’s main office. If the training is seven days, it would not meet the requirements of 1.162-32, but possibly could meet the requirement of a non-taxable working condition fringe benefit under 132(a) and (d) to the employee and deductible under 162(a) to the employer. 2. In example 1 above, the employer paid the hotel directly. What if the employee paid the hotel and put it on the employee’s expense account? If the employer has an accountable expense reimbursement plan, the expenses would be excluded from the employee’s gross income. 3. An employer hires an employee who currently resides 500 miles from the employer’s business premises. This type of local lodging is taxable to the employee, but deductible to the employer under 162(a) and 1.162-25T. 4. An employee normally travels two hours each way between her home and the office. The employee is working on a project that requires her to work late hours. The employer provides the employee with lodging at a hotel near the office. The regulations interpret this as the “Employer is paying the temporary lodging expense primarily to provide a personal benefit to employee by relieving her of the daily commute to her residence.” The result is that the expense is includable in the employee’s gross wages. The employer can deduct under 162(a) and 1.162-25T. 5. In addition to his regular day shift, one week a month an employee is required to be “on duty” each night to respond quickly to emergencies that occur outside the normal work schedule. This does not qualify under 1.162-32, but does qualify as a working condition fringe benefit; it is not taxable to the employee and is deductible to the employer under 162(a). The regulations have provided us with examples where one or more of the conditions of 1.162-32 is not met, but followed up where the facts and circumstances tests may cause the local overnight lodging to possibly qualify under the “working condition fringe benefit” regulations. To gain a better understanding, it is recommended that you read the full text of the final regulations. n

is a consultant on IRS problems, seminar discussion leader, author of continuing education courses and web content provider. She can be reached at gretahickscpa@yahoo.com or www.gretahicks.com. Today’sCPA

BUSINESS PERSPECTIVES

The Benefits Dilemma

By Mano Mahadeva, CPA, MBA | Column Editor

emographic changes, unhealthy lifestyles, an aging population, and the advancement of research and technology are major factors that contribute to explosive health-care costs in the United States. We assume we offer the best health care across the globe, and this is undoubtedly true as it relates to our advances in research and technology. However, this care consumes 18 percent of the U.S. GDP today, with greater projected growth in years to come. This rise in the cost of health care has taken its toll on financial statements through steadily increasing benefit costs. What began as a low-cost employee benefit is now a sizable compensation expense. As such, company benefit programs are under significant scrutiny as employers look for ways to access quality health care for their employees, while balancing the cost to both the organization and the individual. Employers are well aware that to be competitive in the marketplace, they have to offer attractive benefits to hire quality talent and retain their best. Today, receiving benefits is a given; it is an expectation of any employee. With this in mind, employers frame their benefit offerings with two simple questions: how much does it cost to provide a benefit, and how much should the employee be expected to assume? Having great talent on your team offers a competitive advantage, which might mean offering attractive benefit packages to prospective and existing talent. Employees need to be educated consumers so that they are smart about the “when and how” of their health-care spending. It is critical that employees understand the costs of the entire benefit so that they are receptive to programs instituted by their employer. Wellness programs can be created to help change employee lifestyles to control health-care costs and to reduce their absenteeism. Protecting employees from hardships due to catastrophic illnesses is a moral need. The answer will depend on the priorities chosen, balanced against the costs of provision. Employers have responded to increases in health-care premiums by doing the following: increasing employee co-pays and deductibles; premium contributions and cost sharing; reducing, modifying or eliminating specific coverage; offering lump sum payments to providers for specific diagnoses; and providing self-help services and offering flex spending accounts to help pay for health care. Future trends portend the use of higher deductibles and tiered co-pays, greater out-of-pocket payments for the use of “brand” medications, higher out-of-pocket payments for out-of-network use of hospitals or physicians, and an increasing use of prevention and disease management programs. As market-driven forces and legislative forces collide to transform the health care ecosystem, benefit strategists expect to see more consumer-driven health care, defined contribution strategies and wellness programs flourish in coming years. Consumer-driven health Mano Mahadeva, CPA

plans come in various forms, but they are high-deductible health plans that are paired with a spending account. The spending account helps pay for routine expenses, whereas the health plan protects against catastrophic medical expenses. The employee or “consumer” pays routine medical claims via a prefunded spending account. Unused funds roll over at the end of the year to be used against future expenses. Since the cost of a high-deductible health plan costs less, the employer can help fund some or all of the savings account to help transition plans. In a defined-contribution strategy, an employer pays a fixed contribution per employee benefit, thereby limiting any additional exposure to the employer. The establishment of the individual mandate and public health insurance exchanges has given rise to private exchanges, a marketplace of health insurance through which an employer can purchase insurance. Then it is up to the employee to choose a health plan from those supplied by participating payers. This option helps the employer facilitate the migration from a defined benefits model to one of a defined contribution model. Again, this option places the burden on the employee to make smarter qualitative and economic decisions with their care. Keeping employees healthy is a great cost containment strategy for employers. Healthy employees are happier and more productive, and they cost employers less. Despite the skepticism of some, pushed by rapidly increasing health-care costs, many employers have begun to understand the potential of such programs. The programs can be designed broadly or targeted to specific areas, such as weight loss, smoking cessation, etc. Companies such as BP have provided Fitbits to employees as part of a million-step challenge. Some offer cash incentives paid into health savings accounts for measured progress on targeted goals of blood sugar, blood pressure, body mass index and cholesterol. The way to change consumer behavior is to be transparent, and share the basket and value of benefits received by the employee. Proactive communication, ongoing education, the provision of reasonable plan choices, fair contribution and committed investment by an employer could help alter behavior, creating a win-win for all. It is a healthy step for companies to play offense rather than defense by proactively dealing with the benefits dilemma and resolving it. n

is Chief Financial Officer with Solis Health in Addison, Texas. He serves on the Editorial Board for TSCPA. Mahadeva can be reached at mmahadeva@solishealth.com.

Today’sCPA January/February 2015

ACCOUNTING & AUDITING

SSARS 21: Clarified Accounting and Review Services Standard

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

n October 2014, the American Institute of CPAs (AICPA) issued Statement on Standards for Accounting and Review Services (SSARS) 21, which clarified and revised the existing compilation and review standards. The primary change brought about by the updated standard is a defined “bright line” between the preparation of financial statements and the performance of compilation services. This amounts to the most important change in accounting and review services standards in 35 years. SSARS 21 consists of the following four sections. Section 60: General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services Section 60 provides general standards for all SSARS engagements. One main requirement outlined in this section is that for all SSARS engagements, the accountant and client management must agree upon defined terms of the engagement in writing (usually in the form of an engagement letter). This helps ensure that both parties understand and agree to the services being provided. The section also contains guidance to help accountants understand their professional responsibilities when performing these types of engagements. This includes ethical requirements, professional judgment, and quality control, among others. Section 70: Preparation of Financial Statements Section 70 provides standards and guidance for an accountant engaged to prepare financial statements for a client, but not engaged to perform an audit, compilation or review of the statements. A report on the financial statements is not required; however, each page of the financial statements must include a visible statement that no assurance has been provided on the financial statements. Like other nonattest engagements, the accountant does not have to be independent of the client and is not required to disclose if he/she is not. Section 80: Compilation Engagements Section 80 provides standards and guidance for an accountant engaged to perform a compilation engagement on financial statements. The performance requirements for Section 80 are relatively unchanged. The accountant must issue a compilation report on these statements. To distinguish this as a non-assurance engagement, the compilation report has been streamlined to one paragraph and contains no headings. Additional paragraphs are required for special circumstances (e.g., impairment of independence, departures from GAAP, etc.). The type of engagements regulated by Section 80 is the principal change in SSARS 21 and is discussed in further detail below. Section 90: Review of Financial Statements Section 90 provides standards and guidance for an accountant engaged to review a client’s financial statements. SSARS 21 – Section 90 is C. William Thomas 8

essentially unchanged from previous standards, providing only clarifying language. For each review report, the accountant is required to include headings that include the city and state of issuance. The primary difference in Section 90 from previous standards is that now, like audit engagements, accountants are required to include certain emphasis-of-matter paragraphs, if applicable, in the review report.

Summary The principal improvement of SSARS 21 is the elimination of a requirement between Section 70 (Preparation of Financial Statements) and Section 80 (Compilation Engagements), a requirement based on outdated processes, to better facilitate our modern day’s technology-based environment. The previous standard required accountants to perform compilation reports on any engagements in which they prepared and presented financial statements to third parties. The new standard clarifies the distinction between mere preparation of financial statements for the client’s internal use, and those that might be issued to others (accompanied by a compilation report). Today, accountants work directly with their clients to create financial statements, many times using interactive technology such as real time “cloud” systems, which often makes it difficult to determine which entity actually “creates” the financial statements. Because of this ambiguity, accountants have had to use subjective professional judgment in deciding if they should take credit for the preparation of the financial statements. To resolve this gray area, SSARS 21 defines a bright line between Section 70 engagements (Financial Statement Preparation) and Section 80 (Compilation) engagements. The line eliminated the requirement for accountants to perform compilation reports on financial statements they helped prepare. By removing this requirement, accountants no longer have to use subjectivity in determining whether or not they created financial statements for their clients. While it will take time to fully adjust, the clarifications and changes created by SSARS 21 have provided clear and more greatly condensed guidelines for accountants to apply to their non-audit engagements. SSARS 21 must be implemented for all engagements over reporting periods ending on or after, Dec. 15, 2015. If preferable, accountants can also choose to implement the new standard to any engagements with periods ending before this date. n Sources www.journalofaccountancy.com/News/201411156.htm www.aicpa.org/InterestAreas/FRC/ReviewCompilationPreparation/ DownloadableDocuments/SSARS21/SSARS21_Fact_Sheet.pdf cpa-scribo.com/ssars-21-the-lowdown

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. Today’sCPA

TECH ISSUES

Benefits of Embracing Technology to Empower Your Firm

By Jennifer Warawa, Guest Columnist

s an accounting professional, you are likely very aware of the ways the profession is shifting. Clients are craving more contact with their CPAs, and they don’t just want tax and compliance help. Today’s client wants help figuring out where they should spend less money; they need to draft or revamp their business plan or they want insights into what other companies in their industry are doing. How can they benefit from doing things differently? These client shifts may be causing you or your firm some stress, but it doesn’t have to. Bottom line: today’s client wants you to be involved with their business and help them grow. One of the best ways to get started on your journey to transforming your firm into one that is sprawling with deep, ongoing client relationships is to adopt technology that empowers you with the knowledge to be a real-time financial advisor. Taking on an advisory role allows your clients to make quicker, better business decisions. According to the International Data Corporation (IDC), in 2014 there were over 6.3 million small and medium-sized businesses.1 Of these businesses, over 55 percent indicated that they sometimes have a need for business advisory services.2 This means that there are currently over 3 million small and mediumsized businesses that have an immediate need for business advisory services. The opportunity is large; it’s up to you to seek the tools, skills and knowledge to deliver on these needs. Empowering your firm with the technology to be a real-time financial advisor to your clients is the right move for the following reasons. 1. Becoming a more trusted advisor. For many small and medium-sized business clients, a strong business relationship is essential to success. By using technology to provide realtime insights into your clients’ business, the trust level can be elevated when the CPA begins to provide unexpected and valuable information on a proactive basis. Imagine the reaction from a client if his/her CPA were to provide unsolicited information that would help the client increase revenues or reduce costs! 2. Additional revenue. The accounting firm is a business with the objective of maximizing wealth for the stakeholders of the firm. Using technology to offer more consultative, real-time services provides an additional revenue opportunity within the competency of the accounting professional. 3. Diversification. Accounting firms are often compliance driven in the services that are offered, with financial statement and tax return preparation being the focus of activity. Jennifer Warawa

Adopting the technology that gives CPAs the knowledge necessary to make recommendations to their clients offers an opportunity to expand beyond these activities and provide more value. 4. Efficiency of resources. With the traditional services provided as noted above, resource utilization within the accounting firm is cyclical and inefficient. By providing deep, real-time insights consistently, the accounting firm can leverage the resources to create billable time on a more consistent basis. 5. Professional differentiation. Clients will experience a more professional business relationship with their CPA. They will change their perception of their CPA from being a number cruncher to a trusted advisor who can assist them in longterm growth. 6. Be a technology leader. Lead clients into adopting new technologies to improve the efficiency of their operations. 7. Manage client technology migration. Clients are increasingly looking to their CPAs to be familiar with new technologies and to recommend the applications that would best fit their business needs. Acting as an advisor allows the accountant to do so by utilizing technology that stores and accesses client data from the cloud. 8. Meet client needs. Small and medium-sized businesses expect their CPAs to understand technology and provide proactive advice as part of their regular services. 9. Stand out from the competition. Brand and differentiate your accounting firm from the crowd with innovative business advisory services. 10. Attract new clients. As you begin to offer consultative services, it’s only natural that you would attract a new set of clients, ones who have been searching for a CPA who understands technology and uses it to advise them to help their business grow. You are already seen as a trusted steward of your clients’ valuable financial and tax data, so now’s the time to expand your role and provide services that are a natural extension of what you already do today. Adopting the latest technology can enable you and your firm to offer more value-added financial advisory services. Footnotes 1. www.idc.com/getdoc.jsp?containerId=246847 2. “What SMBs Want Research Paper,” March 2014, The Sleeter Group

is vice president and general manager of Sage Accountant Solutions, Sage North America.

Today’sCPA January/February 2015

CHAPTERS

Operation Taxpayer Assistance

Emanuel Burrell, CPA, at the Dallas Chapter Tax Hotline

Teri Reinert, CPA, Sean Ihorn, CPA, and Imelda Moreno-Acosta, CPA, at the El Paso Chapter’s CPAs on Call

By Rhonda Ledbetter | TSCPA Chapter Relations Representative

n keeping with the theme of this issue, we’ll look at some of the tax-related projects completed by TSCPA chapters in 2014. All of the events spotlighted served taxpayers while enhancing the image of the CPA profession in the community. The programs were made possible by the tireless efforts of chapter volunteers.

Corpus Christi CPA Corner was a 10-week program on Corpus Christi’s public radio station. CPAs recorded five-minute segments on tax and a variety of financial topics. The program ran February through April, to coincide with the time the public thinks of CPAs most often. The idea evolved from a call-in program that the chapter held at the station for several years. Discussions with the station, through a volunteer who also serves on its board, produced the idea of a radio program that could be prerecorded. That format increased the pool of volunteer participants by allowing them to work around their own schedule and by breaking down the task so that each person could select a single topic. Funding for the show came from the chapter, which utilized the partial reimbursement program from TSCPA in addition 10

Houston Chapter volunteer preparers assisting students at the VITA site

to earmarking advertising dollars from its own budget. A sponsorship contract was negotiated with the station and the chapter worked with the resulting number of segments to be produced. Many of the same volunteers participated, but most selected different topics from year to year. The topics were drawn from a list where detailed information was available from TSCPA. In addition to individual income tax, they included small business planning, disaster recovery, teaching children about money, planning for life stages such as starting a family or retirement, and more. The variety of subjects made it easy to involve volunteers from all areas of practice, such as business and industry. Making it even easier to be involved, participants could go to the radio station to tape their portion or record it by phone. The segments were hosted by an on-air personality with the station, who was provided with a script by TSCPA. The introductions included the volunteer’s name and employer, thus bringing recognition to them, as well as to the chapter and the profession. The CPA then spoke for most of the time, utilizing the script from TSCPA. The host did a wrap-up, encouraging listeners to go to the Tax Talk section of valueyourmoney.org Today’sCPA

or the chapter’s website for more information. Each segment aired twice, morning and afternoon. The chapter posted the completed segments on its website and Facebook page, and promoted the project through its e-newsletter to members.

Dallas Decades ago, the chapter began a project to offer free basic tax advice to the public. It has been continued as a way to maintain awareness of the CPA profession. In 2014, the chapter again partnered with the Dallas Morning News (DMN), continuing a 20-year collaboration. DMN provided space and technology (including phones) for the volunteers to receive calls from the public and gathered statistics. The paper also provided advance publicity about the event, using sample topics provided by the chapter to pique readers’ interest. Phones were answered by approximately 20 chapter volunteers. The number fluctuated from year to year, depending upon the anticipated questions and actions by Congress

Today’sCPA January/February 2015

causing changes affecting the target audience. Almost all of the volunteers were in public practice and had a few years of experience working with individual taxpayer issues. Calls were answered by the volunteers as quickly as they came in. Taxpayer Education Committee Chair Kenneth D. Sibley, CPA, said, “Sometimes it was like a fire hose and sometimes like a trickle, but the volunteers were all tax practitioners who dealt with the topics on a routine basis.” The number of calls through the years has ranged from 325 to as high as 850. It has been affected by a number of factors, including the weather, tax bills, promotion by the DMN and topics in the national media. The event has always been on a Sunday, starting at noon, as that was when it was thought that the highest percentage of potential callers were at home thinking about taxes. Because the volunteers were in public practice, it was in February rather than later in tax season. CPAs were advised to not go too far out on a limb and, if a call took too much time to answer or involved a topic that continued on next page

CHAPTERS continued from previous page

CPAs were advised to not go too far out on a limb and, if a call took too much time to answer or involved a topic that was clearly more complicated than he/she should deal with on a pro bono basis, to refer the caller to the chapter office

was clearly more complicated than he/she should deal with on a pro bono basis, to refer the caller to the chapter office. The vast majority of the callers were mid- to low-income taxpayers. Answers were limited to the tax “lite” version, and the callers’ questions were almost always ones that could be handled with a fairly basic working tax knowledge. An experienced CPA moved throughout the cubicle area, ready to handle any call at a volunteer’s request.

and asked the panel members. There were no surprises on TV, a great relief to the CPAs on the air. The chapter put together a slideshow that included member photos and firm logos/ads as a promotional piece that aired during the two hours of the program. During the two hours, volunteers in the panel and the phone bank collectively answered more than 225 questions. The phones rang steadily throughout the show.

El Paso After being approached by the local PBS TV station, the chapter revived its taxpayer education program, Tax Time: CPAs On Call. It had been several years since the last one, and each year the station received calls from individuals who were disappointed to learn that the program wasn’t available. The chapter board voted to renew the program and immediately began work to help defray the cost. Sponsors paid a set amount to have their name shown on-air and in chapter announcements. Most of the money was raised through this avenue and the chapter underwrote the remainder. The volunteer chairing the event followed up on the chapter’s email solicitation for volunteers and made personal contacts. The chapter purchased tax reference publications and made them available to the participating CPAs. In addition, the chair put together a list of 100 typical questions and answers that the three CPAs in the on-air panel could use to prepare and feel as comfortable as possible on-camera. In preparation for the program, the station promoted it in advance and fielded calls as interested members of the community sought more information. The Sunday afternoon event took place at the TV station, which provided all of the audio/visual equipment, telephones, desks and chairs. Approximately a dozen chapter volunteers took live calls from the public. When needed, they would trade off when another person might be better able to answer a specific question. The phone bank workers were shown periodically, but their conversations were not broadcast. The moderator was an experienced TV personality who made it easier for the chapter participants. He was given the questions on individual cards throughout the show (handed to him to make it appear they were being answered in real time)

Houston The chapter sponsored and staffed a Volunteer Income Tax Assistance (VITA) site on the University of Houston campus, as it has done since 1998. Twenty CPAs and accounting student volunteers provided free tax return preparation assistance specifically to nonresident alien students and scholars from throughout the Houston metro area. The chapter became involved in the project at the request of IRS Taxpayer Services and the director of tax at UH, to help improve the compliance rate among that group of filers. For the 2013 tax season, more than 225 returns were prepared; in past years, the number has reached 300. However, this represented only half the number of students who came to the site for assistance. It was open midday on Saturdays during tax season, February through April 15. Each time, when the doors closed at 2 p.m., E. Rhett Buck, CPA, JD, and Mark A. Brockman, CPA, continued to review and sign off on returns until all were processed. Vouchers for chapter-sponsored CPE programs in the amount of $30 were given to those who volunteered at the site. A one-hour CPE training seminar for nonresident alien returns was conducted on the first day. On each scheduled Saturday thereafter, there was a 30-minute training session before opening the facility to the “clients.” Volunteer preparers, besides having the opportunity to give back to their community, got valuable training and experience preparing basic nonresident returns within an environment of limited liability.

Playing Your Part Now is the perfect time for you to see what you can do to develop or help with a taxpayer assistance program in your area. Contact your chapter office to volunteer. n Today’sCPA

Eckert Designs 3 changes to closed books

Evans Mobile 12 unaccepted transactions

SPOTLIGHT ON CPAS

Texas Bound Mississippi Native Finds Niche in the Lone Star State, Its Oil and Gas Industry, and Business Valuations Practice

By Anne McDonald Davis

his is not Burger King,” David Butler, CPA-Houston, explains with a smile. “You don’t get it your way.” So goes the tricky, emotion-charged, complex and ever-varied world of business valuations. Butler elaborates: “For instance, a company is being sold. The owner generally thinks his or her creation is worth more than it objectively is. But I’m not an attorney; I’m not an advocate. My job is to be neutral and objective. There’s a tremendous amount of judgment involved, true, but it’s informed judgment. It’s a synthesis of facts.” He concedes that this often turns out to be an unpopular reality. Clients settling an estate want a low valuation to ensure a favorable tax situation. Others embroiled in a lawsuit may push for a high valuation to justify a lucrative settlement. “I just went through a situation last week, very volatile,” he recalls. “It’s not easy to keep your cool, but you have to. Dwight Eisenhower once wrote in his diary, ‘Anger does not think.’ It can be tough to keep that in mind. Sometimes clients are simply overwhelmed by their feelings; I understand that. It’s my responsibility to stay calm.” Even given such tense moments, Butler says he loves his job, simply because he’s never bored.

A Change in Direction An earlier career was spent “figuring out how much orange Tony the Tiger’s stripes should have” jokes Butler, who went into brand management for Con Agra, Sara Lee and Kellogg after earning his MBA in marketing from Vanderbilt. But one day at work, fate intervened. He recounts: “The guy who was our vice president of marketing, Carlos Gutierrez, was a very smart guy who was being groomed 14

From left to right: Ben, Drew, Abby, David and Barbara Butler at the 2014 graduation ceremony for Cinco Ranch High School.

to be CEO. (Gutierrez later went on to serve as secretary of commerce for George W. Bush.) He made it a personal initiative to see that we weren’t just spending a lot of money – that we were generating a certain level of return, that we were accountable to stockholders. So he instructed a bunch of us in marketing to go up to the fourth floor and read the investment banking analysts’ reports on the food industry. I was probably the only one of 45 guys who did it … and I decided it looked a lot more interesting than what I was doing!” So, back to school Butler went, this time at the University of Nebraska-Omaha for his master’s of accountancy. Once Butler passed the exam and put in his “two years of boot camp” at a public accounting firm, he went directly into business valuation practice. “Looking back, I think perhaps I was interested in this field because of my father, David Sr.,” he reflects. “My dad’s engineering practice made a big impression on me. I grew up watching him grow a business, manage the operations and staff, move offices. That’s probably why I’m in this type of business –

professional services/consulting – instead of working for a single company. Dad wound up being president of the American Society of Heating Refrigerating and Air Conditioning Engineers (ASHRAE). After his term, he chaired a committee that promulgated an indoor air quality standard still in use today. For a CPA, that’s the equivalent of saying, ‘I helped write ASC 805.’ We lost Dad unexpectedly in 2012 and at his funeral, Barney Burroughs, a longtime ASHRAE colleague, told me that because of that particular standard, my father helped influence the way HVAC engineering is practiced throughout the United States. I guess I hope to leave some small professional legacy myself.” Born and raised in Mississippi, Butler was destined to head for the Lone Star State someday given his interest in the energy industry. (He’s a key leader for the Houston Chapter’s Energy committee and is chairman of the ASA’s award-winning Energy Valuation Conference.) He feels right at home in the Houston office of Hill Schwarz Spilker Keller. Today’sCPA

“

I absolutely love Texas. This state has the best business environment of anywhere I’ve ever lived.

“

Butler enthuses: “I absolutely love Texas. This state has the best business environment of anywhere I’ve ever lived. There’s a whole cultural difference that may go back to where and how Texas was founded. The spirit of Sam Houston, the oil wildcatters … a willingness to take risks, to reward entrepreneurs. A lot of forward-looking people live and work here.” Speaking of home, Butler shares his with Barbara, his librarian wife of 23 years, and their three kids. The oldest son, Drew, is a college freshman. Ben is a high school sophomore and Abby’s in eighth grade. “Funny thing,” chuckles Butler, “I’m 5 feet, 8 inches [tall], and both my boys are over 6 feet. The sandwich guy at Subway actually asked me how I did that!” Family time is divided between attending Ben’s wrestling matches, Abby’s concerts (cello) and now advising Drew (who wants to major in

advertising) on how to write ad copy. But other than Friday Family Movie Night, in season it’s college football and more college football. “On Saturday, the TV is on pretty much all day and all evening,” he admits ruefully. “The SEC network is the greatest invention ever!” He adds: “I am trying to learn how to play chess – I like the analysis. Like what I do for work, it’s complex. I also like to read challenging 20th-century literature, authors like Faulkner and Joyce. I can’t seem to veg out; it seems to rejuvenate me to work some complex problem. That pays off when I’m working out a knotty purchase price allocation.” Butler says his guiding principle is the Westminster Shorter Catechism, which addresses the duty God requires of man. “That applies to every aspect of my life. Like not bending when a client wants me to. I’m not perfect, but that ideal is always in front of me.” n

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Today’sCPA January/February 2015

TAKE NOTE TSCPA Member Recruitment Campaign TSCPA is continuing to reach out to Texas CPAs who have not yet joined to encourage them to connect with their professional association that is responsible for connecting, protecting and advancing CPAs in Texas. You can help. Be sure to promote the value of TSCPA membership to your nonmember colleagues and urge them to join your professional community. To learn more about how TSCPA serves CPAs, please visit www.tscparoi.org. n

Membership_Infograph_RL_Layout 1 12/16/14 11:35 AM Page 2

(and the Senate, and the Regulatory Agencies)

Source:Texas State Board of Public Accountancy

u u u u u u u u u u u u u u u u u u u u u u u u u u u u

u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u

YOUR VOICE ---- PLUS -----

What’s New On the TSCPA Website

VOICES

TSCPA Private Health Insurance Exchange. TSCPA partnered with Pearl Insurance to offer the TSCPA Health Care Exchange, a private exchange marketplace for competitively priced insurance coverage. Enrollment began on Nov. 15, 2014. For more information, go to the website at http:// tscpainsure.org.

27,000

talking to the Legislature

It can take years to become a CPA, but in hours much of your credential’s value could be erased with just one bill.

u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u

u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u

in THE 2013 TExAS lEgiSlATivE SESSion,

TSCPA reviewed all 6,379 bills filed to find those that affect CPAs and the profession. Of those, 516 bills would have impacted Texas CPAs. Those BILLS FILED bills were tracked. All while CPAs were busy keeping up with their day-to-day BILLS TRACKED work and not having BY TSCPA BILLS to worry about it.

6,379

516

1,637

PASSED

Go to tscpa.org to learn more about …

New Postings on the Sharblog. On the Sharblog, TSCPA’s Executive Director/CEO, John Sharbaugh, CAE, shares his thoughts and ideas on TSCPA and professional matters, along with an occasional post about life in general. TSCPA encourages you to visit John’s blog for the latest postings and leave your thoughts and opinions in the comment section. You can find the blog on TSCPA’s website at tscpa.org or at www.thesharblog.com. n

u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u u

153 mEmbERS SERvE on EigHT TSCPA CommiTTEES ACTivEly wATCHing

legislative activities and information released by standards-setting bodies to be sure CPAs aren’t negatively impacted, including:

CPA-PAC Committee Federal Tax Policy Committee Legislative Advisory Committee

Legislative Regional Coordinators Professional Ethics Committee Professional Standards Committee

Relations with the IRS Committee State Taxation Committee

yoUR CERTiFiCATE iS PRoTECTED... CHAlK iT UP To TSCPA.

Join Us!

SEE oUR DiSCoUnTED oFFER on bACK 16

Texas Society of Certified Public Accountants

Post Your Job Openings on the Society’s Website Are you looking to fill a position at your firm or company? Need assistance during tax season? If so, you can post your job listings for free on tscpa.org. This special TSCPA member benefit lets you promote your opening for 60 days via the Society’s online job openings center – at no charge to you. Email your listing to DeLynn Deakins at ddeakins@tscpa.net to get started. n Today’sCPA

Practice Management Institute is a Succession Planning Resource

TSCPA Seeking Awards Nominations

TSCPA offers the Practice Management Institute to assist members with their succession planning needs and issues. Developed in partnership with the Succession Institute, LLC, the Practice Management Institute provides TSCPA members with free material and content on succession planning. There are also CPE self-study course offerings available at a discounted rate for those who would like to receive CPE credit. To learn more and utilize this members-only resource, please go to the CPE section of the TSCPA website at tscpa.org, scroll down and select Practice Management under Tools and Information. n

During your participation in professional events and activities over the next few months, consider the members you might want to nominate for TSCPA awards. Is there a young CPA who deserves to be recognized? Do you know someone who is doing great work promoting the accounting profession? Is there someone making a difference in your chapter or local community? TSCPA’s Awards Committee is seeking nominations for Meritorious Service to the Profession, Distinguished Public Service, Outstanding Chairman, Honorary Fellow, Honorary Member and Young CPA of the Year. All criteria details are available online. For more information, go to TSCPA’s website at www.tscpa.org/eweb/DynamicPage.aspx?webcode=ABTawards or contact Melinda Bentley at mbentley@tscpa.net; phone 800-428-0272, ext. 279 or 972687-8579 in Dallas. Nominations are due April 30, 2015. n

CGMA Designation for Management Accounting Members The Global Management Accounting Principles Help Businesses Make Better Decisions The Chartered Global Management Accountant (CGMA) designation was created by AICPA and the Chartered Institute of Management Accountants (CIMA), two of the world’s largest accountancy bodies. The CGMA is a global designation that recognizes U.S. CPAs and CIMA members who work in management accounting roles. The business world is changing rapidly, and the sheer volume and velocity of information coming at us is seemingly impossible to wrangle. As a result, quality decision-making in business has never been more difficult to achieve. In response to these issues, CIMA and AICPA have produced four Global Management Accounting Principles. The principles were created to guide best practice, make sense of information overload and bring consistency to decision-making. Information Overload and Decision-Making Google’s Eric Schmidt says that every two days, the world creates as much information as it did from the dawn of civilization up until 2003, and everyone is feeling the pressure. For example, almost half of Asia’s CFOs say their decision-making is hindered by information overload. Meanwhile, according to CGMA research, more than 90 percent of global senior executives are seeking better ways to gain insight from financial and non-financial data. This information deluge, coupled with the fierce competition today’s organizations face, have Today’sCPA January/February 2015

created a “perfect storm” of chaos for businesses. The four principles are a much needed – and exceedingly appropriate – response to these stresses. The Four Principles Provide the Right Solution at the Right Time: Now Developed in consultation with CEOs, CFOs, academics, government bodies, regulators and professionals from 20 countries on five continents, the four principles ascertain that: • Communication provides insight that is influential; • Information is relevant; • Impact on value is analyzed; and • Stewardship builds trust. Used together, they break down silos through influential communication; bring the most reliable and relevant information to the forefront for further examination; drive analysis that reveals organizational values; and make integrity and trust integral parts of a company’s long-term sustainability. The result is better business from the top down, while also instilling confidence in stakeholders, investors and the public that the right decisions are being made with the right information. The Global Management Accounting Principles Help Bring Structure to Complexity Ninety percent of senior executives believe a stronger partnership with finance in the

decision-making process will help them better manage their organization. They perceive such a partnership as a necessary, ongoing opportunity, leading not only to improved decision-making, but also helping mitigate risk. Management accounting is like GPS for the C-suite, guiding strategy through the provision of future-focused insight and analysis. While it sits alongside financial accounting, it has lacked the same level of guidance to ensure consistent practice worldwide. The principles help fill the gap by establishing the values, qualities and norms that represent management accounting’s best practices. Barry C. Melancon, CPA, CGMA, president and chief executive of AICPA, said: “The Global Management Accounting Principles empower evidence-based decision-making that prioritizes long-term success over short-term gains. With the principles in place, management, stakeholders, investors and the public can have more confidence in the actions that organizations take.” AICPA and CIMA encourage executives, CFOs and boards of directors worldwide to use the principles as the basis for benchmarking and improving their finance functions. Download the full Global Management Accounting Principles and get more information at cgma.org/principles. n 17

TAKE NOTE Accountants Confidential Assistance Network The Accountants Confidential Assistance Network (ACAN) is a peer assistance program that 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. You can also contact TSCPA’s Craig Nauta at cnauta@tscpa.net. To learn more about the program, please go to TSCPA’s website at tscpa.org. Under the Resource Center tab, scroll down and click on Accountants Confidential Assistance Network. n

Submit an Article to Today’s CPA The editors of Today’s CPA magazine are seeking article submissions. Today’s CPA is a peer-reviewed publication with an editorial board consisting of highly respected CPA practitioners. If you would like to see your name in print, submit an article for consideration in the magazine. For more information, please contact managing editor DeLynn Deakins at ddeakins@ tscpa.net or technical editor Bill Thomas at Bill_Thomas@baylor.edu. n

Members Expelled The following people have had their membership in TSCPA expelled by the Executive Board under TSCPA Bylaws Article III, Section (4B). This action was a result of the revocation of their CPA certificate by the Texas State Board of Public Accountancy. • Randy J. Johnson, Cedar Park; • Lucy A. Porter, Garland; • Blake Y. Stock, Dallas. n

Statement of Ownership

Today’sCPA

CGMA. Boost your wow factor. Make it happen at cgma.org

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. 15484A-326

TAKE NOTE

Six Tips for Using Data More Wisely

By Brett Knowles

rganizations are collecting more data than ever before and processing them in new ways in an effort to improve their businesses. However, often they are not using the data in the right way – if they are using them at all. Eighty-seven percent of finance professionals said Big Data holds the potential to change the way business is done, according to the CGMA report From Insight to Impact: Unlocking Opportunities in Big Data. But 86 percent of those surveyed said their businesses struggle to get valuable information from the data they have. Hurdles to maximizing data’s value include organizational silos, challenges related to data quality and an inability to work with unfamiliar, non-financial data. Following are six ways to make sure you are collecting the right data and making the most of the data you already possess. 1. Consider the broad indicator over the precise measurement. There are many indicators that show us general trends happening in our organizations. Often, organizations spend lots of time and money drilling down too deep into a problem when such drilling isn’t really necessary. Ask yourself: Do you really need to measure it down to the fifth decimal? Or will a more general indicator suffice? Take employee satisfaction, for example. Does your company need detailed measurements of pay and benefits compared with those of the competition? Does it need to deeply analyze promotion opportunities offered or the culture inside the organization or how good the boss is at motivating and inspiring people – or even the office and business environment itself ? You can measure and analyze each of those things, but that could be very expensive. Instead, you could use a broad indicator such as absenteeism. 20

Generally, if a company sees abnormal spikes in absenteeism, it’s a sign of dissatisfaction. From there, you can dig deeper. It may not be because of any one of the factors listed above; it may, in fact, be something as small as a lack of parking. The benefit of that indicator is that it doesn’t try to explain what’s wrong in your organization. In this case, absenteeism is like the “check engine” warning light on the dashboards of many automobiles. It doesn’t tell you exactly what’s wrong, but it tells you that something is wrong and that you should have it checked out. High absenteeism is a good startingpoint indicator – one that might prompt an organization to more deeply examine salaries, culture, managers and so on by doing focus group work and surveys. The best part: Absenteeism data are free. 2. The data that you gather often need to be received more quickly than the impacts and the stresses facing your organization. Data are often more valuable to you if they are received faster than if they are precisely accurate. Consider the fast-food drive through. The cycle time through the drive through is about three minutes, which means data have to be replenished faster than once every three minutes to be useful to the operations people in that part of the business. On the other hand, the supply chain might work on, say, a one-week cycle. Therefore, the data don’t have to be as fast. Supply-chain managers don’t need to know what’s happening every minute, but they certainly need to know what’s happening every day or every couple of days, whereas setting up a new store location might take a year. The data those managers need have a less-frequent drumbeat. So, even inside the same organization, you may have different needs for how fast the data must be. But the point is that data Today’sCPA

need to be arriving ahead of the stresses and the risks that your organization faces. 3. Make sure leadership is aligned with strategic priorities and sees the same activities the same way. We need a way to establish the most important things we should be looking for and score our performance accordingly. Imagine, for example, your strategy is focused on growth by entering new markets. When you take a look at performance of activities – such as sales into new market areas or the number of new customers you’ve been able to attract outside of your existing areas – those data should have more value than measures that would be important under a different strategy. Determine your focus based on your organization’s strategy; this will determine whether you look at measures such as the number of customers buying multiple products or the number of repeat customers. Depending on the strategy, consider different measures to ensure alignment on how you look at your organization’s performance. In a multi-location business, however, this can be a challenge because you might have one newly established business unit that is growing into the market and another unit that has been there for a long time and in that business unit, they’re looking for share of wallet. You can even have different strategies inside the same corporate entity. You should have visual triggers when leadership is looking at the data, so they know when they’re stepping over the line from a penetration strategy to a share-of-wallet strategy. 4. Once you’ve determined what the right measures are, be prepared for them to change as your organization does. Measures can’t remain the same over time. Think of something like a new product development cycle. In the early part of that cycle – the product idea creation – you might be looking at things like the number of product ideas. During the next phase, you’ll look for product development indicators like the time from idea to first prototype. The next phase might be product testing, where the measure needs to change to, say, an approval rating from a beta test audience. Finally, during product launch, you might look at sales per month. 5. In most cases, the organization is already collecting the data you need; you just need to know how to use it. You should always be able to find data within your organization that indicate how a process is running, whether you’re looking at the inputs, the transformation activities or the outputs. The main benefit of using available data is that it doesn’t add costs to your organization. You don’t need more people to gather the information because you’re already gathering it. You don’t need more people to process the information because you’re already processing it. Secondly, it allows you to get your scorecard and dashboard set up very quickly. You’re not held ransom for data. In some cases, the signal strength of those data might not be as strong as you would like. The quality of data you need depends on the type of decision at issue. You do not need Six Sigma accuracy for all decisions. For instance, the data you need to extend a marketing program for a Brett Knowles

month can be less accurate than the data required to terminate an employee or close an office. Using information that already exists creates higher ownership faster. You’ll gain much more acceptance when you begin using indicators that people in the organization already know and respect rather than those you have imposed on them. Because you’re using existing data, your net training cost is significantly lower. So, it’s often faster, cheaper and better to start with broad indicators. From there, you can determine whether to investigate further and if so, where – and how deeply – to probe next. 6. Present the right data in the right way to the right people. Think of an organization as an airplane that needs to see the business world around it at various heights – from 30,000 feet to ground level. Each altitude level needs its own form of information presentation. Senior management wants to cruise along at that 30,000foot information altitude, mostly just seeing Big Data landscape features: the information equivalent of a mountain range, an ocean or a city. However, the data should be comprehensive enough for management to spot any digital puffs of smoke coming from fires that need to be put out. A Balanced Scorecard with performance indicators, trends and information on the data’s strategic importance would be the best tool here. If any one indicator is performing below expectations, management needs to dive into it to understand what’s causing the problem. Once a problem is identified, data presenters and their software must be nimble enough to zoom in to provide a closer look for the appropriate managers. When a problem is spotted, management will want to drop down to 20,000 feet. At this point, the data presenters need to narrow the scope of information and begin providing some operational tools, such as flow charts, to gain an understanding of what’s happening. Next, data presenters must be able to descend to 10,000 feet and provide diagnostic tools so managers can become more directional in their behavior. This isn’t meant to be eye candy. It should be a detailed, data-intensive dashboard that provides comprehensive information designed to help managers at a tactical level. Finally, at ground level, organizations need analytic tools so management can become prescriptive. These are the spreadsheets and grids that display all forms of detailed data used to assess how the organization is performing individual tasks. There’s a parallel between the levels of the organization. In a good organization, the leadership team should be able to pass this information to the next level down and so forth. Copyright © 2011-2014 American Institute of CPAs. Copyright © 2011-2014 Chartered Institute of Management Accountants. All rights reserved. This article first appeared in CGMA Magazine. For more articles, sign up for the weekly email update from CGMA Magazine at http://bit.ly/UZ07NC.

is the executive partner of pm2, a performance management consulting company based in Canada. He has assisted more than 3,000 organizations around the world. He may be reached at brett@pm2.ca.

Today’sCPA January/February 2015

CAPITOL INTEREST

The 84th Texas Legislature Convenes

By Bob Owen, CPA | TSCPA Managing Director, Regulation and Legislation

an. 13, 2015, marks the opening of the 84th session of the Texas Legislature. On that day, undoubtedly, Rep. Joe Straus (R-San Antonio) will be elected speaker of the House for his fourth consecutive term. He will preside over a House with a strong Republican majority in a session where the more conservative wing of his own party may create more friction than the Democrats. Indeed, pundits say Texas is now a three-party state: The Republican Party, the Tea Party faction of the Republican Party and the Democrats – now the third party. The Senate will have the most conservative members in recent memory, maybe ever. Newly elected Republican Lt. Gov. Dan Patrick is joined by 20 Republican senators, including eight new senators, all arguably more conservative than the ones they replaced. The big question is whether the Senate will scrap or modify the two-thirds rule. That rule, in place for decades, requires a two-thirds majority of senators to agree to bring up a bill for a vote. While the Republicans dominate the Senate, they are one vote short of a two-thirds majority. It only takes a majority of the senators (16) to change the rule and that rule change has been an election issue for some senators and Patrick. Most pundits predict the rule will be altered, perhaps reducing the requirement to 60 percent, giving the Republicans complete control of the Senate agenda. Senators from rural areas have typically supported the two-thirds rule, regardless of party, and there will be no Democrats voting for the rule change. If the rule is changed, the historically collegial atmosphere in the Senate will likely disappear. There is an interesting twist to the Senate dynamics. The session starts on Jan. 13, but the governor and lieutenant governor do not officially take office until Jan. 20. That means the first week of the session, current Lt. Gov. David Dewhurst is technically presiding over the Senate. Will they go ahead and adopt the rules before Patrick takes office? Whether they do it immediately on opening the session or after Patrick is sworn in, make no mistake – Patrick will be the Senate leader regardless of the official date he takes office.

The Hot Buttons At the TSCPA Grassroots Seminar in December, most of the speakers agreed that social issues would be front and center during this legislative session, taking up much of the session’s committee and floor debate time. Abortion, gay marriage, gun rights, school vouchers, homeschooling and charter schools may consume an inordinate amount of Legislature floor time. One speaker suggested this session might be more difficult than usual for special interest bills, because floor time will be limited. In the 82nd Legislature, many bills died waiting to be scheduled for floor debate, because of the extensive time spent on budget issues. This may be another session where the hall to the floor is littered with bills that have been approved by committees, but never get a vote. Newly elected Gov. Greg Abbott has announced his legislative priorities as border security, education, roads and cutting taxes. Those topics will also be front and center, with border security possibly being 22

the most vocally trumpeted issue. Border security bills will be passed. Abbott’s initial proposals on border security include a substantial increase in the Department of Public Safety budget to be dedicated to border security. Patrick has also made border security one of his top priorities. CPA Rep. John Otto (R-Dayton), speaking at TSCPA’s Grassroots Seminar, indicated border security was likely the number one issue in the House, as well as the Senate. Otto said, “We must do something on a permanent basis to deal with human trafficking, drug smuggling and cartel violence on our borders.” While it’s not exactly border security, expect bills and debate on eliminating in-state tuition eligibility for Texas resident undocumented college-age kids. Texas law now extends in-state tuition to them, but speakers at the Grassroots Seminar expected that law to be repealed. It’s another major emphasis for Patrick. Abbott’s emphasis on education is an important signal to legislators that school finance, as well as educational process issues, should be addressed. The school finance issue is in the shadow of a court case in which the district court judge ruled the state’s school finance system is unconstitutional. That case is on appeal to the Supreme Court of Texas and is unlikely to be resolved before the session is over. This uncertainty will hang like a dark cloud over the always-difficult budget discussions. Otto opined that school finance should be addressed during the session, but admitted there might be reluctance to do so. Abbott offers specific plans to add at least $4 billion to road construction funds. In addition to the almost $2 billion made available with the approval of a constitutional amendment in November to use so-called rainy day funds for road construction, Abbott calls for vehicle sales tax revenue to be devoted to roads, which could add almost another $2 billion. Of course, the question for legislators will be how to replace that $2 billion in the general fund if these sales tax revenues are dedicated to road use. Proposals to cut taxes abound. During the campaigns, cutting property taxes was the mantra. Many bills have already been filed making some type of property tax cut, limiting appraisal creep or improving the appraisal process. None of these bills are massive property tax cuts. The most popular seems to be to raise the homestead exemption for homeowners, which has about a $2 billion price tag. Subsequent to the election, there seems to be more discussion about modifying, reducing or eliminating the franchise tax. Several bills have already been filed to eliminate or phase out the franchise tax. Reducing the franchise tax would fit nicely into Abbott’s goal of making Texas more business friendly. It’s also a lot easier to adjust the franchise tax than it is to grant meaningful property tax relief.

The Budget The budget, or officially the Appropriations Act, is the only bill that the Legislature must pass. Current estimates indicate the state will have a surplus for the current biennium ranging from $5 to $10 billion. Will that kind of surplus be projected for the next biennium? Glenn Hegar, the new state comptroller of public accounts, gets to Today’sCPA

make that call. The Legislature can’t budget to spend any more than Hegar says the state will collect in revenue. The free fall of oil prices that’s going on as I write this article will certainly make Hegar’s job more difficult. The most likely scenario is that the state will have more money to spend than the Texas Constitution allows to be spent. The constitutional limit on the next biennial budget has been set at 11.68 percent. That limit only applies to general revenue funds and does not apply to funds collected for specific purposes as set out in the Texas Constitution. Most of the state’s budget is made up of those constitutionally designated funds and federally funded expenditures. Otto, who served as a vice chair of the House Appropriations Committee last session, pointed out that the Legislature only has expenditure control over about 17 percent of the total state budget. Clearly, the state has sufficient revenue to craft a budget to adequately fund state programs as they are currently operating and have money left over. The question is what to do with that left over money. Legislators have a long list of what to do with any surplus, starting with transportation and tax cuts. While there is a surplus, there is not enough to fund everything on every legislator’s wish list. That will be the challenge of the budget writers for this session, not what to cut, but how to determine spending priorities. Most pundits and several legislators seem to expect a special session before a final budget can be crafted.

TSCPA Legislative Agenda TSCPA’s plans for the coming session are modest. Our primary legislative effort will be to propose legislation to eliminate redundant filing requirements for limited partnerships and professional associations. One of our members called to our attention that these entities must file reports with the secretary of state periodically that include the same information that is already reported on franchise tax reports. These requirements were enacted prior to the margin tax law that requires limited partnerships and professional associations to file franchise tax returns. Since the state already has this information from the franchise tax return, we believe the reporting to the secretary of state should be eliminated. TSCPA will continue to propose changes to the franchise tax to reduce complexity and increase consistency. All of our proposals made it into bills last session, but only one actually passed. We will continue to make our suggestions available to legislators. TSCPA will also continue to oppose any effort to impose sales taxes on professional services. For the first time in several sessions, TSCPA will not be proposing changes in the Texas Public Accountancy Act. When the Accounting Bob Owen, CPA

and Review Services Committee of AICPA issued new standards that change the way CPAs deal with unaudited financial statements, it looked like a change in the act might be necessary. The new standards prescribe a new “preparation service” that was not contemplated when the act was passed. The new preparation service applies whenever a CPA prepares or assists a client in preparing financial statements, but the client does not require a compilation report. After consulting with the Texas State Board of Public Accountancy, it was determined that the board could accommodate the new standards with additional rules and that no change in the act would be necessary. There has also been a change in the Uniform Accountancy Act (UAA) that will require a change to the act for Texas to be in conformance. The UAA is a model accountancy act jointly developed by AICPA and the National Association of State Boards of Accountancy. While the UAA has no authoritative standing since each state establishes the qualification and licensing requirements for CPAs, over many years states, including Texas, have gravitated to laws that are similar to the UAA. The recent UAA change makes it easier for CPA firms to practice across state lines and is referred to as “firm mobility” for discussion convenience. The change eliminates the need for an out-of-state CPA firm to get a state license when performing an audit in a state other than the firm’s home state. The firm is still bound by the laws and rules of the state where the audit is performed. TSCPA is supportive of this change, but determined it was not a good time to open the act to make this one change. It will be considered for future legislative sessions, likely to be proposed when other changes to the act are necessary. Before firm mobility becomes a reality, all states must conform to the UAA. Several states already have firm mobility, but it will be a number of years before it becomes a national reality. n

is TSCPA’s managing director of regulation and legislation. Contact him at bowen@tscpa.net.

Today’sCPA January/February 2015

COVER ARTICLE

The

Perfect

Storm Has the Tide Turned Against Offshore Tax Evasion?

Todayâ&#x20AC;&#x2122;sCPA

By Jason B. Freeman, JD, CPA The government is building momentum in its effort to turn the tide against offshore tax evasion. With the fall of Swiss bank secrecy, the rise of the Foreign Account Tax Compliance Act of 2009 (FATCA), and an increasingly global push for crossborder transparency, we are truly entering a new era: an era marked by international cooperation. The government, with its net now cast wider than ever, is poised to haul in a big catch. The past five years have seen an unprecedented movement towards transparency and international cooperation. A growing number of countries have signed on to information-exchange agreements, such as FATCA. Super-national organizations – such as the Organization for Economic Cooperation and Development (OECD), G20 and the European Union have pushed, with much success, for more effective disclosure agreements. Government prosecution efforts have led to the collapse of Swiss bank secrecy. The capstone on the effort has been the Internal Revenue Service’s (IRS’s) voluntary disclosure program – a program that has, by most accounts, been wildly successful, bringing forward more than 50,000 Americans and infusing over $6.5 billion in taxes, penalties and interest back into federal coffers over the past five years. The government, however, is anything but complacent with this success. Congress has put the political spotlight back on hidden offshore accounts. The Senate Permanent Subcommittee on Investigations, in a lengthy and extensive report, took the Department of Justice (DOJ) to task for its “lax” past enforcement efforts and failure to prosecute enough U.S. citizens with undisclosed accounts. It called on the DOJ “to obtain the names of U.S. taxpayers with undeclared accounts at tax haven banks” and to “take legal action against U.S. taxpayers to collect unpaid taxes on billions of dollars in offshore assets.”1 Such pointed criticism and calls to action, coming on the heels of truly unprecedented success, underscores the political will behind the effort to prosecute those who have not yet come forward. Importantly, that political will is guided by more than highminded ideals of fairness and tax compliance. There is a much more fundamental driver: the need for tax revenues.2 The IRS estimates that the annual U.S. tax gap is around $450 billion,3 and unreported offshore funds account for almost one third of

Today’sCPA January/February 2015

this gap, an estimated $150 billion.4 Those are big dollars in the face of an annual deficit that exceeds $500 billion.

A Little History The U.S. government has long been concerned about offshore tax abuses and the role that tax haven banks have played in facilitating tax evasion. Over 30 years ago, the Senate Permanent Subcommittee on Investigations first began conducting investigations into how U.S. taxpayers were using offshore secrecy jurisdictions to hide assets and evade taxes.5 Attempts to gauge the magnitude of the problem have varied over time, but current estimates indicate that trillions upon trillions of U.S. dollars are held offshore. Throughout the years, the government has undertaken a number of initiatives to combat offshore tax abuses. One major prong of the attack has been its ongoing effort to establish tax treaties and tax information-exchange agreements with foreign countries. For many years, however, offshore tax havens staunchly resisted entering into such agreements. Bank secrecy jurisdictions, the most prominent of which was Switzerland, successfully created barriers to information exchange. Partly in response to such barriers, the United States also established another key initiative, its Qualified Intermediary Program. In addition to these measures, the government undertook a number of multilateral initiatives, such as the establishment of the Joint International Shelter Information Centre. These efforts met with relatively modest success in terms of curbing offshore tax evasion. However, they paved the way for new-and-improved intergovernmental approaches like FATCA that will surely usher in a new era in the battle against offshore abuses. The Rise of FATCA and Intergovernmental Cooperation At the forefront of the government’s attack is FATCA, which was part of the 2010 Hiring Incentives to Restore Employment (HIRE) Act, though its provisions were set for delayed and phased-in implementation. The first wave of disclosure obligations and withholding tax went into effect on July 1, 2014, and the effects will soon be seen. continued on next page

COVER ARTICLE continued from previous page FATCA requires foreign financial institutions to either report foreign accounts held by U.S. citizens to the U.S. government or incur a 30 percent withholding tax on investment income received from the United States. As a result, foreign financial intermediaries will soon be reporting many, many more accounts to the IRS. Because FATCA and its regulations are extremely complex, many countries have opted to enter into streamlined Intergovernmental Agreements (IGAs) with the United States, which offer procedures that simplify compliance and streamline the exchange of information. The IRS now has 45 IGAs in place, and has reached agreements in substance with another 56 countries. 6 In addition, the United States has a network of tax treaties, tax information exchange agreements (TIEAs), Mutual Legal Assistance Treaties (MLATs) and Agreements (MLAAs). These instruments serve an increasingly important role in tax enforcement. As of 2011, the United States had more than 140 tax treaties, protocols, TIEAs, MLATs or similar tax information exchange agreements with 90 foreign jurisdictions.7

International Efforts to Combat Cross-Border Tax Evasion There is also growing international support to stop tax haven banks from facilitating tax evasion.8 Two key multilateral organizations, the G8 and G20, have strengthened efforts to combat cross-border tax evasion and have become increasingly vocal in support of their efforts. For 2009, the G20 heads of state issued a joint and unequivocal communique declaring that “the era of bank secrecy is over.” Following UBS and other highly publicized scandals, the G20 intensified its focus on tax haven abuses, including supporting the OECD’s efforts to promote the exchange of tax information across borders, the issuance of a list of uncooperative tax havens, and the imposition of sanctions on jurisdictions that impeded tax enforcement.9 After the enactment of FATCA, G20 and G8 world leaders advocated for automated tax information exchanges as the new international standard, and have called on countries to make automated exchanges effective by the end of 2015.10 The OECD has increased the pressure on countries to move towards transparency and to adopt broader information exchange provisions. It has issued influential reports criticizing tax havens that have failed to provide key information, criticizing bank secrecy laws in tax haven jurisdictions, and identifying “uncooperative tax havens.”11 These efforts have directly led a number of previously uncooperative jurisdictions to get on board and commit to exchange information in international tax matters.12 In addition, the OECD has developed model informationexchange agreements to support reporting regimes like FATCA13 and has sought to enable countries to exchange information on an automatic basis.14 Like the G20 and G8, it has established a goal of enabling automated reporting by 2015. The Voluntary Disclosure Programs and Key Prosecutions Another key initiative has been the IRS’s Offshore Voluntary Disclosure Program (OVDP). The OVDP allows qualifying 26

taxpayers to disclose unreported foreign accounts in exchange for reduced penalties and an agreement not to refer them for criminal prosecution. Although the IRS has had a general voluntary disclosure practice for decades, in recent years there has been an explosion in the number of voluntary disclosures of offshore accounts. This has largely been the product of a targeted disclosure program and its promotion through well-publicized prosecutions and settlements that have given taxpayers an extra nudge to enter into the program. In roughly the past decade, the IRS has implemented four programs specifically targeted at offshore voluntary disclosures – the 2003, 2009, 2011 and 2012 programs.15 These programs have, by most estimates, been very successful, though they may have only scratched the surface. While the voluntary disclosure programs resulted in over 50,000 Americans coming forward and over $6.5 billion in back taxes, penalties and interest, prior government estimates indicate that there were some 500,000-plus U.S. citizens utilizing abusive offshore schemes to start with.16 The 2003 Offshore Voluntary Compliance Initiative was the first voluntary disclosure program specifically targeted at foreign disclosures. In 2003, the IRS estimated that over 500,000 U.S. taxpayers were engaged in abusive offshore schemes.17 Following an investigation into the identity of offshore credit and debit card holders believed to be hiding taxable income, the Service offered eligible taxpayers an opportunity to come back into compliance, and mitigate their civil penalties and exposure to criminal prosecution. Though the initiative was only open for three months, it resulted in just over 1,300 disclosures and raised approximately $200 million. For about five years, however, there was not much action on the offshore voluntary disclosure front. But in 2009, the world changed. In February of that year, the U.S. DOJ entered into a deferred prosecution agreement with UBS AG, Switzerland’s largest bank. UBS agreed, as part of the deferred prosecution agreement, to a fine of $780 million. As a result of this scandal, UBS ultimately agreed to turn over 4,700 undisclosed accounts owned by U.S. clients. Shortly after UBS entered into a deferred prosecution agreement, the IRS, leveraging its position of strength, rolled out the 2009 OVDP. The threat that UBS was disclosing names and account information that would link U.S. citizens to undisclosed accounts led many to come forward under the OVDP and greatly increased its success. The 2009 OVDP was only open for a limited time and provided taxpayers with relief from criminal prosecution, as well as limited civil penalty exposure. To enter into the program, a taxpayer was required to fully disclose their offshore accounts and pay 20 percent of the highest account balance during an eight-year look-back period plus some minor additions. The program, which closed in October 2009, led to about 18,000 taxpayer disclosures and raised $3.4 billion.18 In 2011, the IRS offered taxpayers another chance to come forward. However, the 2011 program came with a higher cost, providing a standard penalty equal to 25 percent of the taxpayer’s Today’sCPA

highest account balance. The higher cost was designed to strike a balance between incentivizing those who had not yet come forward to do so, but also sending a message that the deal would not get sweeter if the account holder waited longer. The 2011 offshore voluntary disclosure initiative offered the same basic benefits as the 2009 program, but it also introduced the possibility of reduced penalties for qualifying taxpayers. The program, which closed in September of 2011, resulted in about 15,000 disclosures and raised just over $1.6 billion. In 2012, DOJ indicted Wegelin & Co., Switzerland’s oldest bank. Months later, Wegelin & Co. pled guilty to conspiracy to defraud the United States and forfeited $32 million in frozen U.S. accounts, paying fines and restitution of another $42 million. The indictment and guilty plea crippled Wegelin beyond repair and it soon folded. The fall of Switzerland’s oldest bank was symbolic of the decline and eventual fall of Swiss banking secrecy. Also in January of 2012, the IRS introduced yet another voluntary disclosure program. Like the 2011 program, the 2012 initiative once again raised the standard penalty, this time to 27.5 percent; however, it also introduced a new “opt-out” procedure, allowing taxpayers to opt-out of the one-size-fits-all penalty structure and make their case for a lower penalty. It also maintained a reduced penalty structure for qualifying taxpayers and introduced, for the first time, a “streamlined” procedure for “low risk” nonresidents.19 Rather than set a deadline, the IRS left the 2012 program open-ended, reminding taxpayers that it may end the program at any time. And as of July 1, 2014, a date that coincides with phased-in FATCA reporting obligations, the IRS implemented its latest changes to the program and expanded the streamlined procedure – a welcomed development for many U.S. citizens with undisclosed accounts, as it may greatly decrease the applicable penalties under some circumstances. While the government’s efforts against UBS and Wegelin had been successful, in May 2014, the government notched its biggest settlement yet. Credit Suisse entered a plea of guilty to charges of conspiracy to aid and assist in the preparation of filing of false tax returns. As part of that guilty plea, Credit Suisse agreed to pay a total of $2.6 billion to the DOJ, along with $100 million to the Federal Reserve and $715 million to the New York State Department of Financial Services. All told, in the span of five years, Switzerland saw its oldest, longest-running private bank prosecuted and destroyed, and its two largest banks, UBS and Credit Suisse, agree to massive financial penalties and systemic changes that ended decades, if not centuries, of business practices. The United States government, aware that it has the upper hand, has not let up. There are currently 13 other Swiss banks under active DOJ investigation. These banks include, among others, Julius Baer, Basler Kantonalbank, Zuercher Kantonalbank, and Swiss arms of Lichtenstein’s LLB and the UK’s HSBC.20 The banks on this so-called DOJ “hit-list,” having witnessed the fates of UBS, Credit Suisse and Wegelin & Co., are braced for the fallout. Today’sCPA January/February 2015

Swiss Non-Prosecution Program In the midst of all this, the DOJ, in August of 2013, announced a program to enable almost 300 Swiss banks to receive nonprosecution agreements or non-target letters. The DOJ made the program available to all Swiss banks except those under active DOJ investigation,21 and the Swiss Finance Department urged Swiss banks to participate. Over 100 Swiss banks have apparently entered into the program. In essence, these banks are agreeing to fully disclose their practices with U.S. customers and pay severe penalties in exchange for the United States government’s agreement not to prosecute them. The United States government will be able to utilize the information that it receives to request the identity of U.S. taxpayers under the U.S.-Swiss tax treaty. The fruits of that information will likely set off the next wave and write the next chapter in this saga. The Impact of the Fall of Swiss Bank Secrecy These developments set the stage for major changes in the foreign account reporting landscape and led to the fall of Swiss bank secrecy. Switzerland’s strategic importance in the battle against offshore evasion cannot be overstated. Switzerland had long been a stronghold for bank secrecy and hidden bank

THE FALL OF SWITZERLAND’S OLDEST BANK WAS SYMBOLIC OF THE DECLINE AND EVENTUAL FALL OF SWISS BANKING SECRECY.

accounts. Even as recently as 2013, it was ranked number one out of 82 jurisdictions on the Tax Justice Network’s Financial Secrecy Index.22 Swiss banks manage about a quarter of the world’s total assets,23 and until recently, the two largest banks – UBS and Credit Suisse – managed about half of those assets. While the United States has had a tax treaty with Switzerland since 1951, that treaty effectively provided for the exchange of information only in fairly narrow circumstances.24 These limitations, though addressed to some extent in a 1996 protocol, were unique to the Swiss-United States treaty; they did not exist in any other United States tax treaty.25 For years, Switzerland resisted adopting the OECD standards for tax information exchange. However, in March 2009, Switzerland reversed more than a decade of tax policy and announced that it would adopt the OECD standard for tax information exchange.26 continued on next page 27

COVER ARTICLE continued from previous page

FOREIGN FINANCIAL INTERMEDIARIES WILL SOON BE REPORTING MANY, MANY MORE ACCOUNTS TO THE IRS.

revised Swiss tax treaty is one of the top recommendations from the Senate Permanent Subcommittee’s 2014 report.30 In the meantime, Switzerland has already demonstrated its commitment to change and has entered into several agreements with the United States that open the door to transparency now. Switzerland has not only signed an IGA with the United States, requiring all Swiss financial institutions to comply with FATCA’s new disclosures,31 it also signed the Convention on Mutual Administrative Assistance in Tax Matters, a multilateral agreement that mandates that participating countries cooperate with international tax information exchange requests and tax enforcement efforts.32 These developments are a trend. The past several years have seen countries that include well-known tax havens, such as Liechtenstein, Austria, Belgium, Luxembourg and Monaco, pledge that they will cooperate with international tax enforcement efforts and share tax information. More countries will follow. And with the success in Switzerland, the government has expanded its efforts to target other key countries. For instance, in November 2013 – as part of what the IRS described as the “next phase” of its offshore compliance crackdown – the IRS announced that it would soon be deploying agents from SB/SE’s special enforcement program to examine U.S. taxpayers suspected of holding undeclared accounts in Indian banks. Initiatives like this will be interesting to follow and will undoubtedly lead to some high-profile prosecutions.

Other Forces at Work In addition to the international forces at work, a number of domestic developments have bolstered the government’s attack. For instance, the revamped whistleblower program has seen a burgeoning and unprecedented cottage industry of whistleblowers in the offshore account context. Prosecutions for undisclosed offshore accounts are higher than ever. John Doe summonses, which allow the government to obtain information about a class of taxpayers even when it does not know their identities, have increased the information flow and sidestepped traditional legal barriers to gathering information. The development of the socalled required records doctrine has seen an emasculated, if nonexistent, Fifth Amendment privilege in the context of undisclosed accounts. These developments bode poorly for those still hesitant to come forward and disclose their offshore accounts. By September of that year, Switzerland signed a protocol with the United States amending the countries’ tax treaty to incorporate the OECD standard for tax information exchange,27 a standard that conforms with the U.S. Model Income Tax Convention and U.S. law governing IRS inquiries.28 Interestingly, though, the United States Senate has yet to vote on ratifying the revised treaty due to a hold on consideration of the treaty that has been in place for more than three years.29 But that may soon change, as ratification of the Jason B. Freeman, JD, CPA 28

Unprecedented We are truly witnessing an unprecedented movement towards global transparency and international cooperation. Those with undisclosed accounts are increasingly at risk, and the stakes are only getting higher. The fall of Swiss banking secrecy, the rise of FATCA, and the growing international coalition calling for crossborder tax transparency is creating a proverbial perfect storm that is lending credence to the claim that the tide is turning against offshore tax evasion. n

is a tax attorney with Meadows Collier Reed Cousins Crouch & Ungerman in Dallas, Texas and an adjunct professor of law at Southern Methodist University’s Dedman School of Law. Today’sCPA

Footnotes 1. United States Senate Permanent Subcommittee on Investigations, Committee on

18. “IRS Offshore Programs Produce $4.4 Billion to Date for Nation’s Taxpayers;

Homeland Security and Governmental Affairs, Offshore Tax Evasion: The Effort to

Offshore Voluntary Disclosure Program Reopens,” IRS Press Release No. IR-2012-5,

Collect Unpaid Taxes on Billions in Hidden Offshore Accounts, Feb. 26, 2014, p. 7

Jan. 9, 2012.

(hereinafter, “Offshore Report”).

19. See 2013 Annual Report to Congress – Volume One, Taxpayer Advocate Service,

2. Offshore Report, supra n. 2, p. 9.

“Offshore Voluntary Disclosure: The IRS Offshore Voluntary Disclosure Program

3. See “IRS Releases New Tax Gap Estimates; Compliance Rates Remain Statistically

Disproportionately Burdens Those Who Made Honest Mistakes,” at 232.

Unchanged From Previous Study,” report by the Internal Revenue Service, No. IR2012-4, Jan. 6, 2012. 4. See Hearings before the Permanent Subcommittee on Investigations, “Offshore Profit Shifting and the U.S. Tax Code – Part 1 (Microsoft and Hewlett-Packard),” S.

20. RPT-Swiss Banks Risk Bigger Than Expected Fines in U.S. Tax Case, June 2, 2014, Reuters, in.reuters.com/article/2014/06/02/usa-switzerland-taxidINL6N0OJ14L20140602. 21. U.S. Department of Justice Press Release, “United States and Switzerland Issue

Hrg. 112-781, Sept. 20, 2012; “Offshore Profit Shifting and the U.S. Tax Code – Part

Joint Statement Regarding Tax Evasion Investigations,” Aug. 29, 2013, www.justice.

2 (Apple Inc.),” S. Hrg. 113-90, May 21, 2013.

gov/tax/2013/txdv13975.htm; “Joint Statement between the U.S. Department of

5. See “Crime and Secrecy: The Use of Offshore Banks and Companies,” hearing before the U.S. Senate Permanent Subcommittee on Investigations, S. Hrg. 98-151, March 15, 16 and May 24, 1983. 6. List of countries available at www.treasury.gov/resource-center/tax-policy/treaties/ Pages/FATCA-Archive.aspx. 7. See “Tax Administration: IRS’s Information Exchanges with Other Countries Could Be

Justice and the Swiss Federal Department of Finance,” Aug. 29, 2013, www.justice. gov/iso/opa/resources/7532013829164644664074.pdf. 22. Tax Justice Network, “Financial Secrecy Index,” Nov. 7, 2013, www. financialsecrecyindex.com/introduction/fsi-2013-results. 23. Swiss Bankers Association, “The Economic Significance of the Swiss Financial Centre-Banks and branches in Switzerland,” www.swissbanking.org/en/home/

Improved through Better Performance Information,” prepared by U.S. Government

finanzplatz-link/facts_figures.htm; Swiss Bankers Association, “The Financial

Accountability Office (GAO), Report No. GAO-11-730, Sept. 2011, available at www.

Centre: Engine of the Swiss Economy,” July 29, 2013, p. 16, www.swissbanking.

gao.gov/assets/590/585299.pdf.

org/en/20130715-fp_motor_der_schweizer_wirtschaft.pdf.

8. Offshore Report, supra n. 2, p. 24. 9. Offshore Report, supra n. 2, p. 23. 10. Offshore Report, supra n. 2, p. 24-25. 11. OECD, “Harmful Tax Competition: An Emerging Global Issue,” 1998, available at www.oecd.org/tax/transparency/44430243.pdf (hereinafter “Harmful Tax Competition”); OECD, “Improving Access to Bank Information for Tax Purposes,” 2000, p. 14, available at www.oecd.org/tax/exchange-of-tax-information/2497487. pdf; “Towards Global Tax Co-operation: Progress in Identifying and Eliminating Harmful Tax Practices,” June 2000, p.17, available at www.oecd.org/tax/ transparency/44430257.pdf (hereinafter “Towards Global Tax Cooperation”). 12. Harmful Tax Competition, supra n. 12; Towards Global Tax Co-operation, supra n. 12. 13. See “Update to Article 26 of the OECD Model Tax Convention and its Commentary,” (approved by the OECD Council on July 17, 2012), www.oecd.org/ctp/exchange-oftax-information/120718_Article%2026- ENG_no%20cover%20(2).pdf, at ¶¶ 5.1 and 5.2. 14. OECD, “Standard for Automatic Exchange of Financial Account Information,” Feb.

24. See, e.g., J. Springer, “An Overview of International Evidence and Asset Gathering in Civil and Criminal Tax Cases,” 22 Geo. Wash. J. Int’l L. & Econ. 277, 303-8 (1988); Aubert, “The Limits of Swiss Banking Secrecy Under Domestic and International Law,” 273 Int’l Tax & Bus. Law. 273, 286-88 (1984); J. Knapp, “Mutual Legal Assistance Treaties as a Way to Pierce Bank Secrecy,” Case W. Res. J. Int’l L. 405-8, 418-20 (1988). 25. Offshore Report, supra n. 2, p. 31. 26. See “Switzerland to adopt OECD standard on administrative assistance in fiscal matters,” press release issued by Switzerland, Mar. 13, 2009. 27. “Protocol Amending the Convention Between the Swiss Confederation and the United States of America for the Avoidance of Double Taxation with Respect to Taxes on Income, Signed at Washington on October 2, 1996,” Sept. 23, 2009. 28. Offshore Report, supra n. 2, p. 35. 29. Alison Bennett, “Treasury Continues Push for Ratification of Three Stalled Treaties, Official Says,” Bloomberg BNA, June 5, 2013, www.taxtreatiesanalysis. com/2013/06/entreasury-continues-push-ratification- stalled-treaties-official.

13, 2014, www.oecd.org/ctp/exchange-of-tax-information/Automatic-Exchange-

30. Offshore Report, supra n. 2, p. 7.

Financial-Account-Information-Common-Reporting-Standard.pdf.

31. “Agreement between the United States of America and Switzerland for

15. Government Accountability Office, Offshore Tax Evasion, Mar. 2013, GAO-13-318, p. 2. 16. “Challenges Remain in Combating Abusive Tax Schemes,” report by the Government

Cooperation to Facilitate the Implementation of FATCA,” Feb. 14, 2013, www. treasury.gov/resource-center/tax- policy/treaties/Documents/FATCA-AgreementSwitzerland-2-14-2013.pdf.

Accountability Office to U.S. Senate Finance Committee, No. GAO-04-50, Nov. 2003, 32. “Switzerland signs OECD tax convention,” Oct. 15, 2013, www.swissinfo.ch/eng/ politics/Switzerland_signs_OECD_tax_convention.html?cid=37118262. p. 1. 17. Id.

Today’sCPA January/February 2015

FEATURE

To Defer or Not to Defer: Considering Your Spouse in Planning Social Security Benefits

Todayâ&#x20AC;&#x2122;sCPA

By Phillip J. Korb, CPA, MBA, MS; Jan L. Williams, CPA, MS; and Steven A. Gershman, CPA, PFS, CFE

n arduous decision facing persons considering retirement is when to start collecting Social Security benefits. In planning to maximize Social Security benefits, oftentimes the right decision comes down to whether you will outlive your life expectancy. People can elect to start collecting Social Security benefits as early as age 62, wait until full retirement at age 66, or defer the election until age 70. The longer one waits to start collecting Social Security benefits, the greater the monthly benefits. Those who start collecting benefits at age 62 will receive a 25 percent reduction in benefits, while those who wait until after age 66 will receive 100 percent of their benefits. Those who wait an additional four years will receive 132 percent of their benefits (an 8 percent increase of benefits each year they defer the election up to age 70). Most tax planning software, including the Social Security online calculator, is based on a recipient’s own benefits. However, the impact of one’s spousal benefits, which is often overlooked, can be an integral component of this decision. Consider the following cases, one that includes just the Social Security benefit recipient, one that includes the Social Security benefit recipient and spouse, and another that includes claiming spousal benefits under the file-and-suspend strategy.

Case 1 – Individual Analysis Assume the Social Security beneficiary is a male, approaching age 66, who has earned the current maximum Social Security benefit at full retirement age (66) of $2,533 per month. He is considering whether he should wait until age 70 to begin receiving benefits to receive the maximum benefits of $3,350 per month. The breakeven analysis in Exhibit I1 reports that one would need to live 12.4 years

Exhibit I – Individual Analysis (without Spouse) Male, age 66 (full retirement age) Monthly benefit at age 66 = $2,533 Monthly benefit at age 70 = $3,350 Annual benefit at age 66 = $2,533 x 12 months = $30,396 Annual benefit at age 70 = $3,350 x 12 months = $40,200 Benefits of beginning at age 66 = Benefits of beginning at age 70 Let Y equal breakeven in years from age 70: $30,396 (Y + 4 years) = $40,200Y Solving for Y: Y = 12.4 years

Today’sCPA January/February 2015

beyond the election age of 70. Therefore, to benefit from deferring benefits until age 70, the beneficiary would have to live longer than 82 years and 5 months. According to the online Social Security calculator, a male has a life expectancy of 84.4 years or 18.4 years beyond the full retirement age of age 66. On average, it would appear that deferring benefits until age 70 would be the recommended course of action. However, factors such as one’s health, economic circumstances, desire to retire early or opinion of the financial soundness of the Social Security system may favor electing benefits at the full retirement age of 66. Either way, life expectancy plays a major role in making the decision.

Case 2 – Analysis with Spouse The age of a spouse is another important factor that should be considered when an individual is deciding whether to elect Social Security benefits. Couples can increase their Social Security income by coordinating their benefits. A spouse can receive up to half of the electing spouse’s Social Security benefits if the spouse is age 66 (full retirement age) or a reduced benefit if between age 62 and 66. A couple’s combined Social Security benefits can be greater if the electing spouse defers benefits until age 70 and the spouse is at least age 66 (full retirement age). Accordingly, if a couple is aiming to maximize Social Security income, the age of the spouse can influence the age at which an individual elects Social Security benefits. Assume that the individual in our above example is married and his female spouse is exactly four years younger, age 62 (to eliminate the need for monthly adjustments to the calculations). Furthermore, assume that the spouse has earned no Social Security benefits of her own. If the husband opted to receive Social Security benefits at age 66, he would again receive $2,533 per month. The female spouse could begin to collect at the same time, normally one half of the spouse’s monthly benefit. However, because she would start collecting benefits early at age 62, she would only receive approximately 35 percent of the spouse’s benefit or $887 per month; i.e., 35 percent times $2,533. If both spouses would wait four more years to begin receiving benefits at ages 70 and 66 respectively, they could increase their combined monthly income approximately 35 percent. The husband would receive $3,350 per month and the spouse, now having reached full retirement age of 66, would experience no reduction. However, the amount of the spousal benefit would be based on the full retirement age benefit of the electing spouse; i.e., one-half of $2,533 or $1,267 per month. The breakeven analysis in Exhibit II reports that one would need to live 11.43 years beyond the election age of 70. In other words, to continued on next page 31

FEATURE continued from previous page Exhibit II - Analysis with Spouse Male, age 66 (full retirement age) Female, age 62 (spouse) Maximum Monthly Benefit Election at age 62 (reduction to 35% of $2,533)

Begin at age 66 Spouse, age 62

Begin at age 70 Spouse, age 66

$2,533

$3,350

887

Election at age 66 (50% of $2,533)

1,267

Combined monthly benefit

$3,420 x 12

$4,617 x 12

Combined annual benefit

$41,040

$55,404

Benefits beginning at age 66 = Benefits of beginning at age 70 Let Y equal breakeven in years from age 70: $41,040 (Y + 4 years) = $55,404 Y Solving for Y: Y = 11.43 years

benefit from deferring benefits until age 70, the beneficiary would have to live longer than 81 years and five months.2 Including the spouse in the calculation will result in approximately a one-year decrease in the breakeven point. Furthermore, the deferral to age 70 can result in an increase of almost $1,200 monthly and over $14,000 per year. Given that a male age 66 has a life expectancy of 84.4 years (or 18.4 years of additional life expectancy from age 66), it would appear that deferring benefits until age 70 would be the recommended course of action. Most importantly, since the life expectancy of women is greater than men, should the wife outlive her husband, his deferring benefits until age 70 allows her monthly benefit to be stepped up to his monthly benefit of $3,350 (rather than $2,533 per month) for the rest of her life. Again, the health of both spouses, the benefit of having the money earlier when one is younger, the time value of money, and one’s opinion as to the financial soundness of the Social Security system may favor taking the benefits at age 66, full retirement age. When deciding whether to elect Social Security benefits at an earlier age or defer until full retirement age, couples also should consider factors such as their health, economic circumstances, other sources of income, etc. 32

Case 3 – Analysis with File-and-Suspend Strategy Spousal benefits can start when both spouses are at least age 66. However, couples may be able to maximize their Social Security benefits by using the file-and-suspend strategy. Following this strategy, one spouse elects to receive benefits at age 66 and the other spouse files and immediately suspends their benefits until age 70. By the younger spouse waiting until age 66 to collect spousal benefits, they can collect the maximum 50 percent of their spouse’s age 66 benefit. At age 70, the younger spouse would switch to their own benefit. This strategy allows the younger spouse to collect 50 percent of their spouse’s age 66 benefit while both spouses’ benefits continue to increase 8 percent each year (until the maximum benefit at age 70). Upon reaching age 70, they would both collect their own maximum benefit (132 percent). Therefore, to maximize lifetime Social Security benefits, couples should also consider coordinating their benefits under the file-and-suspend strategy.3 Assume that both individuals have earned Social Security benefits of their own and they live to age 90. Further, assume that the husband was born on Jan. 1, 1949, and his wife was born on Jan. 1, 1950. Accordingly, the husband’s benefit would be $2,500 at age 66 and $3,300 at age 70. The spouse’s benefits would be $1,750 at age 66 Today’sCPA

Exhibit III – Comparison of Lifetime Benefits

Strategy

Cumulative Benefits to Age 90

File-and-Suspend Strategy

$ 1,423,890

Both Spouses Begin Collecting at Age 70

$ 1,363,890

Both Spouses Begin Collecting at Age 66

$ 1,237,250

Both Spouses Begin Collecting Immediately (next month at ages 65 and 7

$ 1,209,634

months, and 64 and 7 months)

and $2,310 at age 70. The application process would consist of the following:4 • The husband files and suspends benefits based on his earnings record in December 2015 at age 67, which makes his spouse eligible for spousal benefits at age 66. • The wife files a restricted application for spousal benefits only in the estimated amount of $1,250 in December 2015 at age 66. • The husband begins benefits based on his earnings record in the estimated amount of $3,300 in December 2018 at age 70. • The wife switches to benefits based on her earnings record in the estimated amount of $2,310 in December 2019 at age 70. • In January 2039, the wife switches to survivor benefits, after the husband passes at age 90, in the estimated amount of $3,300. Based on the above process, by the seventh year, annual benefits will be higher than if they both started collecting benefits immediately. By year seven, they will collect $67,320 per year as compared to benefits received if filing immediately, which would be $48,182. The breakeven point would be 13 years from when they start collecting benefits (i.e., 65 years and seven months and 64 years and

seven months). The maximum cumulative shortfall is in Year 4 and totals $167,271. In Year 5, the shortfall begins to decline until the breakeven point is reached. Starting in Year 14, the cumulative excess benefits begin to accumulate. Using the file-and-suspend strategy, if both spouses die at age 90, they will have collected $214,256 more than if they started collecting immediately. Exhibit III compares the cumulative benefits collected based on the file-and-suspend strategy and typical Social Security election ages. The area of Social Security benefits, like any other area of financial planning, requires financial planners to take into account both spouses when giving advice to married couples. In fact, due to a system of interdependent benefits for married couples under the Social Security system, it is even more important to include both spouses when providing financial advice. This planning also should be considered for same-sex couples. While laws have not been finalized regarding Social Security benefits for same-sex couples, those who believe they are eligible are encouraged to file claims right away to preserve their filing date. Once laws are finalized, eligible Social Security benefits will be retroactive to the filing date. n

Phillip J. Korb, CPA, MBA, MS

is an associate professor of Accounting at the University of Baltimore. He may be reached at pkorb@ubalt.edu.

Jan L. Williams, CPA, MS

is an associate professor of Accounting at the University of Baltimore. She may be reached at jwilliams@ubalt.edu.

Steven A. Gershman, CPA, PFS, CFE

is a shareholder with KatzAbosch. He may be reached at sgershman@katzabosch.com.

Footnotes 1. The time value of money and possible higher income taxes in later years have been

The Budget of the United States Government, Fiscal Year 2015 “proposes to

ignored to prevent overly complicating this article. It is unlikely that the time value of

eliminate aggressive Social Security claiming strategies, which allow upper-income

money on a short period of time will have a significant impact on the above outcome.

beneficiaries to manipulate the timing of collection of Social Security benefits in

2. It is assumed that the primary beneficiary’s spouse also lives longer than the same 11.43 years. 3. Individuals and practitioners should be aware that this strategy is under review.

Today’sCPA January/February 2015

order to maximize delayed retirement credits” (page 150). 4. Individuals should be sure to apply for benefits approximately three months before they expect to receive their first payment.

FEATURE

BUYING or SELLING a CPA Practice

By Daniel L. Haskin, CPA, Ph.D.

any situations arise where the owner of a small or medium-sized CPA practice decides to sell the business or buy another one. Changes in the ownership of a practice raise many questions, because this is one of the most challenging situations that can arise for the owners of firms of moderate size. CPAs are experts in many financial areas, but buying or selling a practice is not usually one of those. Consequently, sound preparation for the transfer of the firm is essential for the buyer and seller to have a successful transaction. Why do owners want to sell their practices? CPAs who have devoted years of their lives to building a practice face a difficult situation if they decide to sell their firm. They have invested much personal capital in establishing and growing the business, and often develop a deep sense of attachment. However, there are valid reasons that may cause even the most devoted owner to consider selling his/her practice. The CPA may decide to exit because of age, retirement or health issues. Others may be unable to cope as small business owners since they must perform all the functions of management, such as finance and 34

marketing, in addition to being technical experts in their area of practice. Some CPAs may decide that a career change is right for them. Also, the estate of a deceased CPA may be forced to sell the practice. Why do others want to buy CPA practices? CPAs may decide to buy a practice for a variety of reasons. They may want to begin a new business and see the purchase of an existing one as a viable way to jumpstart a new practice. They may want to expand their existing firm, establish a successor or eliminate competition. One thing that both the potential buyer and the potential seller should realize up front is that the exchange process will take a fairly long period of time and the timing of the sale is of great importance. Consequently, patience will be required of both the buyer and seller while the sale is being processed and closed.

Ways to Sell After a CPA decides to sell, the next step is to choose the method that will be used to sell the practice. The two most common methods are using a broker or an agent and sale by the owner. There are several brokers who specialize in selling CPA firms and Todayâ&#x20AC;&#x2122;sCPA

they can be located on the Internet. There are both advantages and disadvantages to each method. Advantages to using a broker include the professional experience of the broker and expertise with the advertising methods used. The big disadvantage to using a broker is the necessity of paying a commission to the broker, reducing the profit for the seller. Some advantages of sale by owner are direct contact with the buyer and the flexibility to structure the sale. Disadvantages to sale by the owner are lack of expertise by the owner in marketing and in structuring the details of the sale. A CPA who decides to sell the practice personally may use a variety of techniques to attract potential buyers. These include direct mail, advertisements in CPA journals, and referrals from other practitioners.

Valuing the Practice An issue of prime importance for a CPA selling a practice is how to value the business. A common method is to value the practice based on a multiple of the yearly revenues of the firm. The most common multiple is one times the yearly revenue. For instance, if the firm has annual revenues of $200,000, the negotiated purchase price would be $200,000 using a multiple of one. Generally, a practice that is in a good location or has other attractive qualities will sell at a bonus over the multiple of one, while a firm in a poor location will sell for less than a multiple of one. For instance, tax practices located in affluent suburbs with residents who are successful professionals, and auditing practices located near growing and successful small and medium-sized businesses would probably command a bonus percentage. The seller and buyer may be interested in transferring other assets, as well as client accounts in a turnkey transaction. The buyer might wish to assume the seller’s leases on buildings and equipment and/ or retain the seller’s employees. This type of transaction would require appropriate appraisals of the other tangible assets. A variable price base on future fees might expand the buyer pool from the

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continued on next page Today’sCPA January/February 2015

FEATURE continued from previous page

standpoint of the seller. The buyer would probably look on such an arrangement favorably. Such an arrangement could be based on the percentage of clients retained by the purchasing firm over the next few years. For instance, if the seller is billing $200,000 per year, the buyer might agree to pay 20 percent down at closing and future payments will be based on the billings collected from the seller’s former clients. This type of arrangement is most advantageous for the buyer. Two problems associated with variable pricing are the motivation of the seller to retain all of the purchased clients and the seller’s inability to verify the future billings.

Terms of Sale A successful transfer of a CPA practice from the seller to the buyer requires that the terms of the sale, such as the timing of the payments, the financing of the sale, the provisions of a noncompetitive agreement, and the process of due diligence be clearly stated in the agreement. The timing of the payments will be one of the most difficult aspects of the sale to negotiate. Naturally, the seller wishes to negotiate payments that will maximize their early cash inflow, while the buyer will seek to stretch out the payments as long as possible to minimize their cash outflow. Both the buyer and seller must carefully consider the tax implications of the agreement. The two most important considerations are the classification of the assets as long-term capital gain property or ordinary income property, and the timing of the payments for tax purposes. The seller might find it advantageous to stretch out the payments so that installment treatment will be possible. The timing of the payments is directly related to financing. The terms might range from a 100 percent payment by the buyer to 100 percent financing by the seller. The buyer will most likely want to arrange financing by the seller. Other alternatives will be financing through regular credit channels, such as banks and finance companies. In almost all cases, the buyer will insist on a non-competition agreement to protect their new assets. The major provisions of the agreement will relate to time and distance. For instance, the seller might agree not to start a new practice within a radius of 100 miles or to serve any of the existing clients for five years. There might also be a provision that the seller will not serve any of the existing out-of-area clients as a way to enforce the distance provision. Due diligence refers to the process of the buyer verifying the financial data that the seller purports to be true about the practice. Since two or more CPAs who are experts in financial matters are involved, this process can be simple or complicated, depending on the individuals involved. The buyer generally needs to verify revenue, seasonal cash flows, the makeup of the client base, and billing rates, while the seller needs to provide access to the appropriate records while maintaining client confidentiality. Daniel L. Haskin, CPA (OK), Ph.D. – Commerce, Texas 36

Timing of Sale Smaller CPA firms usually derive a large percentage of their revenues from tax preparation. Consequently, the ideal time for such a firm to make the transfer would be after completion of the busy season. Two target dates could be April 15 and Oct. 15. Of course, if the practice has a substantial percentage of other services like compilations or write ups, the timing should be adjusted. One of the most important things for the buyer to consider is providing for a transition year(s). The buyer will have a much higher probability of retaining the purchased clients if the seller assists with the transition. In a small or medium-sized firm, clients will likely have a personal relationship with the owner of the firm. The seller could agree to continue to work with the buyer for a period of time to provide an adjustment period for the clients and thus the retention of clients will be enhanced. The buyer and seller should send a joint communication to clients as soon as possible after closing the sale to inform clients of the transaction. This letter will be a critical feature as it is the first knowledge the clients will have of the sale and will contribute greatly to the future relationship with the new owner. The seller also needs to verify the professional credentials of the buyer before the seller vouches for the buyer to the clients. Careful structuring of the sale and transfer of the practice plus a well-planned transition period will increase the likelihood that the transferred clients will remain with the new owner. Of course, the most important factor in client retention will be the quality of the service rendered by the purchasing CPA. Problems may arise when billing rates differ between buyer and seller. A larger firm may have difficulty consolidating and integrating the accounts of a smaller firm, because the clients may be reluctant to pay the higher billing rates. The clients of a smaller practice may also have difficulty adjusting to the larger firm since they are used to more interaction with the smaller firm’s owners and partners. A buying CPA who specializes in one field such as write-up or investment advising might have a difficult time integrating another practice that specializes in another field such as taxation. An agreement needs to be reached on the billing and completion of work-in-process to insure that the work is completed in a satisfactory manner and that there will be no dispute on the billing. A well-structured transition agreement will eliminate this problem.

The Final Goal: Order and Profit Buying or selling a CPA practice is one of the most significant events that can occur in the career of a CPA. A well-structured sale can be profitable and enjoyable for both parties. A sound sales agreement should lead to an orderly transition period, which will lead to contented buyers, sellers and clients. n

is assistant professor of Accounting at Texas A&M University-Commerce. He may be contacted at daniel. haskin@tamuc.edu. Today’sCPA

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CPE ARTICLE

Net Investment Income Tax and Planning Strategies

Curriculum: Tax Level: Basic Designed For: Tax Practitioners Objectives: Understanding the technical details of the new tax regime of 3.8 percent net investment income tax and its tax planning strategies. Key Topics: Net investment income tax, unearned income, passive income, capital gains, pass-through entity, and estate and trust. Prerequisites: Elements of individual income tax Advanced Preparation: Taxation on investment income 38

Todayâ&#x20AC;&#x2122;sCPA

By James G.S. Yang, M.Ph., CPA, CMA, and Yali Shen, MA

Effective Jan. 1, 2013, under the Health Care and Education Reconciliation Act of 2010 (the Act)1, in parallel with the regular tax and the alternative minimum tax, Congress created the net investment income tax (NIIT). Unlike other taxes, this tax is imposed on a different base, and at different tax rate, than other income. What income is subject to this tax and at what rate? Are there any exclusions? What is the impact on various taxpayers? What is the special feature? This article investigates these details and offers some tax planning strategies to mitigate the tax. Tax Base The targeted taxpayer group for the NIIT is wealthy investors. The NIIT has two special features. First, the taxable base is limited to unearned income only, while the second is a threshold amount of such income that is excluded. The NIIT rate is 3.8 percent of “net investment income,”2 which consists of three different categories:3 (A) Gross income from interest, dividends, annuities, royalties and rents; (B) Gross income derived from passive activities by which the taxpayer did not actively participate in the management of the business, or gross income derived from trade or business of trading financial instruments such as options, calls, puts, forward exchange, futures, etc. Gross income further includes trading of commodities such as corn, wheat, soybeans, etc.; and (C) Net gain attributable to the disposition of property other than property held in a trade or business. This means capital gains from sales of capital assets such as investments in stock, bonds, personaluse properties, etc. Capital losses can be offset against capital gains. The taxable amount is the lower of the taxpayer’s “net investment income” or the modified adjusted income in excess of a threshold amount: (A) $250,000 in the case of a married taxpayer filing a joint return or surviving spouse; (B) $200,000 for unmarried taxpayer or head of household; and (C) $125,000 for married taxpayer filing a separate return. Modified adjusted gross income means adjusted gross income increased by the “foreign earned income exclusion” and the foreign housing exclusion.4 Not every taxpayer is subject to the tax. Only those taxpayers who have investment income with adjusted gross income exceeding a threshold amount are required to pay the 3.8 percent NIIT. Example 1 below demonstrates how the NIIT is calculated. Example 1 – Individual Taxpayer. Adam and Susan are married filing a joint return. They have only salaries and interest income from the bank. What is their NIIT under the Act for each of the following four cases? (See Table 1.) It should be noted that the threshold amount for a married couple filing jointly is $250,000. In Case 1, the adjusted gross income exceeds the threshold amount by $60,000, but interest income is only $20,000. The taxable amount is the lower of these two amounts; Today’sCPA January/February 2015

Net Investment Income Tax In 2013, Congress enacted a new tax on net investment income. The tax rate is 3.8 percent on unearned income from three different categories (with certain exclusions): 1) dividends, interest, annuities, royalties and rents; 2) passive income; and 3) capital gains from sales of nonbusiness-use properties. The taxable amount is the lesser of the net investment income or the modified adjusted gross income in excess of $250,000 for married taxpayers filing a joint return, $200,000 for unmarried, or $125,000 for married filing a separate return. This tax also applies to an estate or trust. This article provides several examples of how the NIIT is calculated. This article also offers some tax planning strategies in an effort to mitigate this extra tax burden. i.e., $20,000. In this case, any increase in interest income will also increase the NIIT, but any increase in salaries will not. In Case 2, interest income is $40,000, but the adjusted gross income exceeds the threshold amount by $30,000. The taxable amount is the lower of these two amounts; i.e., $30,000. In this case, any increase in interest income will increase the NIIT. And any increase in salaries up to $10,000 ($40,000 - $30,000) will also add additional NIIT. In Case 3, interest income is $30,000, but the adjusted gross income does not exceed the threshold amount. The excess is zero. The taxable amount is the lower of these two amounts; i.e., zero. In this case, any increase in interest income up to $10,000 will not increase the NIIT, but amounts in excess of $10,000 will increase the NIIT. In Case 4, although the adjusted gross income exceeds the threshold amount by $20,000, there is no interest income. The taxable amount is the lower of these two amounts; i.e., zero. In this case, any increase in interest income will increase the NIIT. This example illustrates that the taxable base of the NIIT is the lower of “net investment income” or adjusted gross income in excess of the $250,000 threshold amount. NIIT is calculated at 3.8 percent of the taxable base. A taxpayer is in a position to plan to minimize the taxable base. continued on next page 39

CPE ARTICLE continued from previous page Table 1. Adam and Susan’s NIIT Case 1

Case 2

Case 3

Case 4

$290,000

240,000

210,000

270,000

Salaries

+Interest income from bank

+20,000

+40,000

+30,000

Adjusted gross income = a + b

310,000

280,000

240,000

270,000

- Threshold amount

(250,000)

Excess = c - d

60,000

30,000

20,000

Taxable amount = Lesser of b or e

20,000

30,000

x 3.8% tax rate

x 3.8%

NIIT = f x g

760

1,140

Estates and Trusts The NIIT also applies to estates or trusts at the rate of 3.8 percent, but the taxable amount is different. The taxable net investment income is the excess of :5 (A) The undistributed net investment income for the year, over (B) The excess of adjusted gross income over the dollar amount at which the highest tax bracket begins, which is $11,950 for 2013. An estate or trust may earn net investment income. If the income is not distributed to the beneficiary, the income is taxed on the trust return. If distributed, it is taxed to the beneficiary. The threshold amount for an estate or trust is much lower than for individuals. The threshold amount for a trust is only $11,950 for 2013, which means it is more beneficial to distribute the income to the beneficiary than for it to be retained by the trust. Example 2 below elaborates this point. Example 2 – Trust Taxpayer. Benson Trust Fund with Charles as the beneficiary has the following four cases of dividend income and distributions in 2013. Charles is unmarried and has no income other than the dividends from the fund. What is the NIIT for the Benson Trust Fund and beneficiary Charles, respectively? (See Tables 2 and 3.) In Case 1, the trust earns $200,000 in dividend income, but distributes only $100,000. The remainder is $100,000, resulting in $3,346 NIIT. Charles receives $100,000, ending up with no NIIT. Had the trust distributed the remaining $100,000 to Charles, neither the trust nor Charles would have incurred NIIT. In Case 2, the trust has $200,000 undistributed dividend income, resulting in $7,146 NIIT. Charles receives $200,000, resulting in no NIIT. The trust could have distributed an additional $188,050 to Charles and incurred no additional tax liability. In Case 3, the trust has $300,000 undistributed dividend income, resulting in $10,946 NIIT. The strategy illustrates that the trust could have distributed an additional $100,000 to Charles without triggering any NIIT. In Case 4, the trust distributed $390,000 to Charles. The remaining undistributed dividend income is $10,000, which is not subject to NIIT in the trust because it is below the threshold. On 40

the other hand, Charles receives $390,000 in dividends, making him subject to $7,220 of NIIT. Thus, the best strategy is to leave income up to $11,950 in the trust to minimize a beneficiary’s NIIT.

An Add-on Tax Investment income may be taxed at a regular tax rate of up to 39.6 percent, such as interest income or short-term capital gains. Investment income may also be taxed at 20 percent, such as qualified dividends or long-term capital gains. On top of the regular tax, NIIT is an add-on tax. NIIT has its own tax base and own tax rate. If the investment income is derived from a foreign country, such as dividends, it is also subject to two kinds of tax – the regular dividends tax at 20 percent and NIIT at 3.8 percent. This taxpayer may also claim a foreign tax credit. This additional fact points out the complexity that the NIIT has caused. Example 3 deals only with domestic dividends. Example 3 – Figuring the Total Liability. Ed and Cindy are married filing a joint return using the standard deduction. In 2013, they had $230,000 wages and $210,000 dividends from stock. What is their taxable income, regular tax liability, tax on dividends, net investment income tax, and total tax liability, respectively? It should be noted that their taxable income including the $210,000 dividends income is $430,000 ($230,000 wages + $210,000 dividends - $12,200 standard deduction - $7,800 exemption), which falls into the 39.6 percent tax bracket and also leads to dividends tax rate at 20 percent effective in 2013.6 The $210,000 dividends are subject to both dividends tax at 20 percent and the NIIT at 3.8 percent after considering the threshold amount of $250,000. A brand-new tax kicks in on a different tax base and at different rate. See Form 1040-U.S. Tax Liability and Taxable Net Investment Income on page 42. Their adjusted gross income is $440,000, which exceeds the threshold amount of $250,000 by $190,000 ($440,000 - 250,000). The taxable net investment income is the lower of $190,000 or the $210,000 dividends income; i.e., $190,000, which results in an NIIT of $7,220 ($190,000 x 3.8%). This example shows that the $210,000 dividends income is taxed two different ways. The first is the dividends tax at 20 percent, Today’sCPA

Table 2. Benson Trust Fund’s NIIT Case 1

Case 2

Case 3

Case 4

Dividends income

$200,000

400,000

- Distribution to beneficiary Charles

(100,000)

(200,000)

(100,000)

(390,000)

Adjusted gross income = a - b

100,000

200,000

300,000

10,000

- Threshold amount

(11,950)

Taxable amount = c - d

88,050

188,050

288,050

x 3.8% tax rate

x 3.8%

NIIT = e x f

3,346

7,146

10,946

Table 3. Beneficiary Charles’ NIIT Case 1 a

Salaries

Case 2

Case 3

Case 4

+Dividends income

+100,000

+200,000

+100,000

+390,000

Adjusted gross income = a + b

100,000

200,000

100,000

390,000

- Threshold amount

(200,000)

Excess = c - d

190,000

Taxable amount = Lesser of b or e

190,000

x 3.8% tax rate

x 3.8%

NIIT = f x g

7,220

resulting in a dividends tax liability of $42,000 ($210,000 x 20%). The second is the NIIT at 3.8 percent on a different base of $190,000.

Table 4 summarizes the classification of various types of partnership income.

Disposition of Interest in Pass-Through Entity The most important component of the NIIT is passive activity income. The tax applies to passive income only. For example, the purchase of a stock is a passive activity because the stockholder does not participate in the company’s management. Likewise, dividends received and gains or losses from the sale of the stock are passive. However, if an investor organizes a pass-through entity, such as a partnership or an S corporation, is the income from the partnership active or passive income? It depends on what kind of income it is and whether the investor is engaged in active management of the activity or not. Four different kinds of income are derived from a partnership. The first is the pro-rata share of the partnership’s income or losses. The second is the pass-through gains or losses from the partnership’s income, gain or loss, such as interest income from the bank, capital gains or losses from sales of investment in stock or properties. The third is the cash distribution received from the partnership. If the partner’s pro-rata share of the partnership income is already taxed, any cash distribution should not be taxed again. The fourth is the gains or losses from the disposition of the partnership interest.

Exclusions Not every item of investment income is subject to NIIT. There are some exclusions of income. Distributions from the following pension plans are not taxable for NIIT.7 (a) §401(a) employee profit-sharing plan, qualified pension plan, and stock-based employment compensation plan (b) §403(a) qualified annuity plan (c) §403(b) pension plan for school employees and tax-exempt organizations (d) §408 traditional IRA (e) §408A Roth IRA (f ) §457(b) deferred compensation plan for state and local government employees (g) §121 gain exclusion on sale of principal residence – $250,000 for each taxpayer (h) §1031 tax-free like-kind exchange of properties (i) §1035 tax-free exchange of life insurance policies (j) §1202 gain exclusion on the sale of small business stock

Today’sCPA January/February 2015

continued on next page 41

CPE ARTICLE continued from previous page Form 1040 - U.S. Tax Liability Wages

$230,000

Taxable income ($230,000 - 12,200 standard deduction - $7,800 exemption) =

210,000

Tax liability on $210,000 = $28,458+28%x(210,000-146,400) =

46,266 +42,000

+ Dividends tax ($210,000x20%) = + Net investment income tax ($190,000*x3.8%) =

+7,220

Total tax liability ($46,266+42,000+7,220) =

95,486

* Taxable Net Investment Income: Wages + Dividends

$230,000 +210,000

Adjusted gross income - Threshold amount

440,000 (250,000)

Excess adjusted gross income

190,000

Net investment income (dividends)

210,000

Taxable net investment income

190,000

(Lesser of $190,000 or $210,000) =

Table 4. Income from a Partnership: Active or Passive Income

Active Participation

No Active Participation

Pro-rata share of partnership’s income/loss

Active income

Passive income

Pass-through gain/loss from the partnership

Active income

Passive income

Dividends received from the partnership

Not income

Disposition of the partnership interest

Active income

Passive income

Example 4 illustrates this by listing income from a variety of sources.

Example 4 – What is Net Investment Income? David has the following income: gains and losses in 2013. What is his net investment income? (See Table 5.) Items 1, 2 and 3 are not investment activities, and thus they are not investment income. Item 5 is tax-exempt by statute. Items 4, 6, 7, 8 and 9 are investment activities without active participation; thus they are considered investment income. Items 10 and 11 are investment with active participation, and hence they are not investment income or losses. Items 12 and 13 are investment activities without active participation and thus they are passive activities; therefore, they are subject to NIIT. Item 14 is an investment activity with active 42

participation, and hence its gain is not investment income. Item 15 is an investment activity without active participation and thus passive activity; therefore, its income is investment income.

Tax Planning Strategies Although the net investment income tax is an extra tax burden to a taxpayer, there are ways to minimize the impact on the overall tax liability. This section offers some strategies. Adjusted Gross Income Versus Taxable Income The most noticeable feature of the NIIT is the threshold amount, which depends on the adjusted gross income rather than taxable income. The reduction of adjusted income can reduce NIIT, whereas the reduction of taxable income cannot. Many items are deducted before arriving at adjusted gross income, which is termed “for AGI deductions.” Examples include business losses, capital losses, IRA contributions, moving expense, alimony payment, tuition and fees, etc. If a taxpayer is able to utilize these “for AGI deductions,” they will reduce NIIT. On the other hand, “itemized deductions” can only reduce taxable income, but not adjusted gross income and therefore cannot reduce NIIT. Unearned Income Versus Earned Income Taxpayers can make choices that reclassify unearned income as earned income. For example, interest income from a personal checking account is unearned income, whereas interest income from a business checking account is earned income. The former is subject to NIIT, while the latter is not. This distinction shows that a business owner should devote more funds to the business side than the personal side. This is not a significant planning opportunity given the current state of interest rates. Passive Income Versus Active Income Passive income is subject to the NIIT. One of the criteria in differentiating passive participation from active participation is generally a 500 hours annual threshhold9. A taxpayer can usually plan to manage their hours, attain the 500 hour threshold and avoid the NIIT. On the other hand, it might be more beneficial to convert active losses to passive losses. For example, losses from business with active participation are deductible from active income, but not deductible against passive income; hence these losses do not reduce net investment income. As a result, the active losses do not reduce NIIT. If the taxpayer can reduce their participation to less than 500 hours, the activity would become passive activity, and the losses would become passive losses, deductible against net investment income. In other words, from an NIIT perspective, passive losses are more desirable than active losses. Deferral of Taxable Gains on Property In some cases, capital gains from disposition of property can be deferred, reducing net investment income. For example, under the installment method, capital gain from the sale of a property can be deferred until the time when cash is received. Capital gains from like-kind exchange can be deferred until the new Today’sCPA

Table 5. What is Net Investment Income? Net Investment Income

Income, Gain and Loss

Amount

Commissions as a salesperson

$80,000

Distribution from his 401(k) retirement account

1,000

Distribution from his traditional IRA retirement account

2,000

Interest income from a bank account

3,000

Interest income from New Jersey state bonds

4,000

Interest from GM Corporation bonds

5,000

Dividends from investment in GE stock

6,000

Capital gains from sales of GM bonds

7,000

Capital losses from sales of GE stock

(6,500)

His pro-rata share of profit from a partnership in hotel business, and he actively participates in its management

8,000

His pro-rata share of losses from a partnership in restaurant business, and he actively participates in its management

(9,000)

(0)

His pro-rata share of profit from a partnership in computer business, but he never participates in its management

10,000

His pro-rata share of losses from a partnership in construction business, but he never participates in its management

(9,500)

Gains on the disposition of his interest in a partnership in furniture business in which he actively participates in its management

11,000

Gains on the disposition of his interest in a partnership in printing business in which he never participates in its management

12,000

Total

27,000

property is ultimately sold. The capital gains from the sale of a principal residence can be excluded up to $250,000 per taxpayer or $500,000 for a married couple filing a joint return. All of these strategies can reduce NIIT.

Benefits of Retirement Accounts Retirement accounts are another area for potential tax savings. Some contributions to retirement accounts can reduce gross income immediately, such as traditional IRA and 401(k). Distributions from some retirement accounts are also excluded from net investment income, such as Roth IRA and 403(b) and can reduce NIIT. Charitable Contribution of an Appreciated Property When a taxpayer contributes appreciated long-term capital property to a charitable organization, the property is deductible up to the fair market value.8 And there are no capital gains that result from that transaction. The donee can use the current fair market value as its tax basis. Therefore, the long-term capital gains are also eliminated for the donee.9

Gifts and Estate Planning There is another beneficial tax planning strategy. In 2013, gifts to a qualified person are deductible up to $14,000 in 2013 per donee. The lifetime estate exclusion amount has been raised to $5.25 million in 2013. All gifts typically reduce the adjusted gross income of the donor and will reduce the applicable NIIT. This article is funded by the China Scholarship Council. File No.201208535073. n Footnotes 1. The Health Care and Education

5. Ibid §1411(a)(2).

Reconciliation Act of 2010, P. L. 111-

6. Ibid §1(h)1(D).

152, March 30, 2010.

7. Ibid §1411(5) and(6).

2. IRC §1411(a).

8. Ibid §1.170A-1(v)(2).

3. Ibid §1411(c)(1) and (2).

9. IRC §1014(a).

4. Ibid §1411(d).

James G.S. Yang, M.Ph., CPA, CMA

is professor of Accounting at Montclair State University in Montclair, New Jersey. He specializes in international taxation and Internet commerce taxation, and has published 90 refereed journal articles.

Yali Shen, M.A.

is associate professor of Accounting at Yunnan University of Finance and Economics in Yunnan, China. She has been awarded a scholarship under the China Scholarship Council Fund to pursue her study in the United States. She is currently a visiting scholar at Montclair State University, and has published 13 refereed journal articles.

Today’sCPA January/February 2015

CPE QUIZ

By James G.S. Yang and Yali Shen

CPE Article: Net Investment Income Tax and Planning Strategies 1 What is the net investment income tax rate? A. 39.6 percent

35 percent

20 percent

D. 3.8 percent

2 What is the current maximum tax rate on qualified dividends and long-term capital gains? A. 39.6 percent

20 percent

15 percent

D. 3.8 percent

Pension as a retiree

D. Dividends as an investor in stock

3 Which one of the following income is classified as net investment income? A. Wages as an employee

Commissions as a salesperson

4 Which one of the following income is NOT classified as net investment income? A. Interest income from a bank B. Rent income from a tenant

C. Salaries from an employer D. Capital gains from sales of investment in stock

5 All of the following income is classified as net investment income EXCEPT: A. Distributive share of profit from a partnership without material participation B. Distributive share of profit from an S corporation with material participation

C. Capital gain from sale of a personal-use car D. Royalties income from a medical patent

6 Andy has the following income and deduction:

(1) $6,000 of interest income from investment in New York City bonds (2) $5,000 of capital gain from sales of investment in New York City bonds

What is Andy’s net investment income? A. $2,000

$5,000

(3) $4,000 of distribution from his 401(k) retirement account (4) ($3,000) of capital losses from sales of investment in stock C.

$6,000

$12,000

7 In 2013, what is the threshold amount above which the net investment income tax is imposed on an unmarried taxpayer? A. $250,000

$200,000

$125,000

D. $0

8 Bob is a married taxpayer filing a joint return. He has $230,000 in salaries and $30,000 in interest income from a bank account. What is Bob’s net investment income tax? A.

$9,880

$1,140

$380

9 Chuck is unmarried. He has $190,000 in wages and $10,000 in short-term capital gain from sales of investment in stock. What is Chuck’s net investment income tax? A. $7,600

$380

D. None of the above

10 David belongs to the 39.6 percent tax bracket and receives $10,000 of qualified dividends. After the Health Care and Education Reconciliation Act of 2010, what is David’s real total tax liability pertaining to this dividends income only, without considering other constraints? A. $0

$380

$2,380

D. $3,960

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.

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Mail the completed test by Feb. 28, 2015, to TSCPA for grading.

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Answers to last issue’s self-study exam: 1. D 2. D 3. A 4. B 5. C 6. A 7. B 8. D 9. B 10. D 44

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