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

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he year is nearing the end and the smell of 1040s is filling the air. The fast-approaching tax season draws near meaning CPAs must be fully prepared to obtain and handle sensitive client information. As the cover of this issue of CPA Magazine indicates, it is important to have a response plan in place in case one of your client’s identities is stolen. This concept as well as many other technological nuggets of knowledge can be found in this magazine and as part of the Technology Minute video series at CPAMagazine.com. Some of the articles to look for in this issue are Sidney Kess review of windfalls and how these good and bad occurrences for your clients should be handled. Jerry Love refreshes everyone’s memory on what a credit score is and how the various credit bureaus view your clients. Not meant to give you nightmares, Kathleen M. Lach elaborates on the IRS’ various ways of taking property from your clients if they are delinquent in their taxes. Julie Welch keeps it practical and describes several tactics you can use when preparing your clients’ 1040s. I spoke with Dan Henn, CPA and heard how CPAs can expand their firms with tax resolution services. Martin M. Shenkman explores 1040 planning which he shares with you and how it could improve your practice. Lewis Taub explains the pitfalls of the at-risk rules for S corporation shareholders along with solutions. This issue also features articles on technology every CPA should stay up-to-date on: time and billing software, payroll processing software and write-up software. CPE credit may be obtained utilizing the quiz on page 29 after studying the content in this issue. Please read the instructions to make sure the credit satisfies your governing body’s requirements. Additional CPE quizzes over different content can be found at www.CPAMagazine.com.

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Tax Strategies for Windfalls

“

Individuals may have financial windfalls because of a variety of occurrences. Some windfalls result from good fortune, such as winning the lottery or selling a business, while others result from bad fortune, such as medical malpractice or an inheritance. Either way, there are tax consequences to consider. Some consequences are immediate, while others have a long-term impact.

Immediate Tax Consequences of a Windfall

The receipt of a windfall may be taxable or tax-free. The general rule is that income from whatever source derived is includible in gross income (Code Sec. 61). However, there are various exclusions that transform some recoveries into tax-free income.

Damages.

Damages from lawsuits, settlements, and awards are taxable unless they are payable for a personal physical injury or sickness (Code Sec. 104(a)(2)). Thus, damages received for a non-physical personal injury, such as defamation or discrimination, are taxable. So too are punitive damages and damages for back pay and other taxable compensation. Interest paid on a judgment usually is taxable. When an attorney agrees to represent an individual on a contingency basis and there is a recovery, the individual is taxed on the entire award (Banks II, S.Ct., 543 U.S. 426 (2005)). This is so even though the individual does not actually receive the entire award because one third (or whatever portion was agreed upon) is disbursed directly to the attorney. Damages for a wrongful death claim typically are comprised of compensatory damages for physical and mental injury as well as punitive damages for reckless, malicious, or reprehensible conduct by the wrongdoer. The portion for compensatory damages is tax free while the portion for punitive damages is taxable. However, if a wrongful death claim is made under a state statute that treats all of the recovery as punitive damages (i.e., precludes compensatory damages), the recovery is fully excludable for federal income tax purposes (Code Sec. 104(c)). Damages for emotional distress resulting from a nonphysical personal injury, such as job discrimination, are excludable only to the extent used for medical costs. “Soft injuries,” such as headaches, insomnia, and weight loss, usually are treated as emotional distress and allocable damages are not tax-free. For example, in one recent case a postal worker could not exclude damages for these soft injuries arising from her discrimination action; the discrimination did not cause any physical injuries (Barbato, TC Memo 2016-23). Damages received to compensate for property losses may be tax free if the recovery does not exceed the individual’s basis 6 I F A L L 2 016

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Individuals receiving whistleblower awards have argued they are capital gains, but the courts have routinely treated then as ordinary income.

”

Tax Advisor

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

in the property. The recovery is treated as a tax-free return of capital (Code Sec. 1001). As a general rule, legal fees to recover tax-free damages are not deductible while legal fees to recover taxable damages are deductible. Deductible legal fees related to personal injury usually are treated as miscellaneous itemized deductions, which can be written off only to the extent total miscellaneous itemized deductions exceed two percent of adjusted gross income (Code Sec. 67(a)). Miscellaneous itemized deductions are not deductible for purposes of the alternative minimum tax (Code Sec. 56(b)(1)(A)(i)). However, legal fees for certain discrimination actions can be deducted as an adjustment to gross income (Code Sec. 62(a)(20)).

Gifts and Inheritances. The receipt of gifts and inheritances

are tax free, regardless of amount (Code Sec. 102). However, recipients of income in respect of a decedent must include it in their gross income when received (Code Sec. 691(a)). Thus, a person who inherits a $1 million IRA is not taxed on the inheritance of the IRA. However, when distributions are taken from the IRA, they are taxed to this beneficiary. A person reporting income in respect of a decedent can take a deduction for federal estate tax allocable to income when the income is includable (Code Sec. 691(c)).

Lotteries, Gambling, and Prizes. Good luck can translate

into millions of dollars. In January 2016, three winners split a Powerball jackpot of $1.6 billion, and in May 2016, one lucky winner hit the $429.6 million Powerball jackpot. These measures of good luck are fully taxable. In the case of lottery winnings, the only question is when the winnings are taken into income. If a lottery winner opts for the lump sum, it is fully taxable in the year of the drawing (Code Sec. 451(a)). If the winner opts for the payment in installments, the winner is taxed only Continued on page 18

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What is a Credit Score?

This is a question on many people’s minds. A few years ago consumers were trained to monitor their credit report. However, now consumers are seeing commercials asking, “Do you know your credit score?” So what is a credit score? Who creates this score? And what does it mean to the consumer? There are 19 major versions of credit scoring models in use today. However, there are two major credit scoring systems. The most commonly known is the FICO Score and the other is VantageScore. MyFICO.com gives us the background and foundation for the FICO Score: “90% of top lenders use FICO Scores to help them make billions of credit-related decisions every year. FICO Scores are calculated based solely on information in consumer credit reports maintained at the credit reporting agencies. “By comparing this information to the patterns in hundreds of thousands of past credit reports, FICO Scores estimate your level of future credit risk.” Bankrate.com elaborates more on the FICO Score: “Technically, it’s a predictive analytics company founded in 1956. But, generally, when people hear “FICO,” they’re thinking of the scores it gives -- three-digit numbers introduced in 1989 that essentially determine “the likelihood that you will pay all of your (debt) obligations on time for the foreseeable future,” says Barry Paperno, former consumer affairs manager for FICO who now runs the blog SpeakingOfCredit.com. “The first FICO scores, and their descendants, predicted the likelihood a consumer will become 90 days behind on payments over the next 24 months on different debt types. Over the years, the score has been poked, prodded and tweaked from its original formula to account for changes in consumer behavior and the lending landscape, says Frederic Huynh, senior principal scientist at FICO.” Credit.com gives us an excellent overview of VantageScore: “VantageScore first exploded on the credit score scene in 2006 as a joint venture of the big three credit bureaus – Experian, Equifax and TransUnion. “Like other credit scores, VantageScore consists of calculations relying entirely on credit bureau information – not income, bank accounts or other assets – to predict how likely you are to pay your credit obligations on time each month. With an emphasis on paying on time, keeping balances low, and avoiding new credit obligations, the simplicity and common-sensibility of credit scores are often marred by the all-too-frequent credit reporting errors that can lead to credit scoring errors, and that can require active management of your credit – much like managing 8 I F A L L 2 016

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Scores estimate “FICO your level of future credit risk. ”

Financial Advisor

Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA your health.” CreditKarma.com gives us some context on the evolution of the credit scoring system: “Prior to the creation of standardized credit scores, lenders and loan officers would often develop their own “score card” to assess the risk of lending to a particular borrower. This score card could vary drastically from one lender to the next. The major issue with this original method was that it was based on a loan officer’s ability to judge risk, rather than a common set of rules and specific calculations. “So, in the 1980’s, the Fair Isaac Corporation set up the first general purpose credit scoring system based on credit bureau information in order to help remove the inherent inconsistencies that arose from having each lender perform their own credit diagnostics.” Bankrate.com explains this for us: “Your credit score is a three-digit number generated by a mathematical algorithm using information in your credit report. It’s designed to predict risk, specifically, the likelihood that you will become seriously delinquent on your credit obligations in the 24 months after scoring. The Consumer Financial Protection Bureau indicates the most common factors used for the credit score are 1) your most recent credit activity, 2) how long you have had your accounts open and 3) whether you had any debts referred for collection, foreclosure or bankruptcy. However, perhaps even more importantly the Equal Credit Opportunity Act (ECOA) prohibits the use of certain items for use in the calculation of your score. These are: 1) Race or color, 2) Religion, 3) Sex (gender), 4) National origin, 5) Marital Status and 6) whether you have formally disputed information contained on your credit report. Overall the factors align in five broad categories: 1) 30% is amount you owe, 2) 35% is payment history, 3) 15% is length of credit history, 4) 10% is new credit and 5) 10% is credit mix. Some of the items used to calculate your credit score are: • Payment History • How long your accounts have been open and available for

“...credit reporting errors that can lead to credit scoring errors, and that can require active management of your credit – much like managing your health.” you? Generally, more is better. • How long it has been since you used certain accounts? • How long specific credit accounts have been established? • What percentage of your available credit are you currently using? • How many accounts are listed on your credit report? • The age of your oldest account, the age of your newest account and an average age of all your accounts. • The mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. • The derogatory marks such as accounts sent to collections, bankruptcies, civil judgements or tax liens. • How many new accounts have you recently opened? • How many hard credit inquiries are shown on your credit report? Where does this information come from? Your credit score is calculated from information contained on your credit report. For this reason, Bankrate.com confirms for us: “A consumer has three FICO scores, one for each credit report provided by the three major credit bureaus: Equifax, Experian and TransUnion. Unfortunately, consumers currently have access to only their Equifax and TransUnion FICO scores. Experian ended its agreement with myFICO.com in 2009.” A FICO score will range between 300 and 850. The higher the score, the better. The Federal Trade Commission gives us the following guidance for how to improve our credit score: “Credit scoring systems are complex and vary among creditors or insurance companies and for different types of credit or insurance. If one factor changes, your score may change — but improvement generally depends on how that factor relates to others the system considers. Only the business using the system knows what might improve your score under the particular model they use to evaluate your application.” Nevertheless, scoring models usually consider the following types of information in your credit report to help compute your credit score: • Have you paid your bills on time? You can count on payment history to be a significant factor. If your credit report indicates you have paid bills late, had an account referred to collections, or declared bankruptcy, it is likely to affect your score negatively. • Are you maxed out? Many scoring systems evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, it’s likely to have a negative effect on your score. • How long have you had credit? Generally, scoring systems consider your credit track record. An insufficient credit history may affect your score negatively, but factors like timely payments and low balances can offset that.

• H ave you applied for new credit lately? Many scoring systems consider whether you have applied for credit recently by looking at “inquiries” on your credit report. If you have applied for too many new accounts recently, it could have a negative effect on your score. Every inquiry isn’t counted: for example, inquiries by creditors who are monitoring your account or looking at credit reports to make “prescreened” credit offers are not considered liabilities. • How many credit accounts do you have and what kinds of accounts are they? Although it is generally considered a plus to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many scoring systems consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may have a negative effect on your credit score. Scoring models may be based on more than the information in your credit report. When you are applying for a mortgage loan, for example, the system may consider the amount of your down payment, your total debt, and your income, among other things. Improving your score significantly is likely to take some time, but it can be done. To improve your credit score under most systems, focus on paying your bills in a timely way, paying down any outstanding balances, and staying away from new debt.” On June 26, 2016, LaToya Irby published an article entitled 10 Things You Can Do Today to Improve Your Credit Score. 1. Get a copy of your credit reports. 2. Dispute a credit report error. 3. Avoid new credit card purchases. 4. Pay off a past due balance. 5. Avoid a new credit card application. 6. Leave accounts open, especially those with balances. 7. Make contact with your creditors. 8. Pay off debt. 9. Get professional help. 10. Be patient and persistent. Irby’s full article can be read at http://credit.about.com/od/ creditrepair/tp/improvecredit.htm This article is continued on www.CPAmagazine.com.

CPE

Related CPE Quiz on Page 29

Jerry Love is the sole owner of Jerry Love CPA, LLC in Abilene, Texas. He graduated from Abilene Christian University. In addition to being a CPA, he has also earned the designations of PFS, CFP, CVA, ABV, CITP, CFF, and CFFA. In 2006-07, Love was the Chairman of the Texas Society of CPAs. Manage, Enhance and Expand Your Practice F A L L 2 016 I 9

The Extraordinary Taking Power of the IRS

We are all very familiar with the ability of the IRS to take aggressive collection action against an individual or business with unpaid tax balances. Most commonly, it will levy a bank account or receivable, or garnish wages. Recently, however, we have experienced more aggressive actions by IRS collectors in their efforts to secure payment on tax debts. We would like to briefly discuss two lesser-known actions which may be imposed by the IRS to take a client’s assets, of which you should be aware.

The Nominee Lien

The IRS is looking closely at real property (most commonly) held by a relative of a tax debtor to determine if it can assert a nominee claim.

Tax Controversy Advisor

Kathleen M. Lach

Under IRC §6321, “If any person liable to pay any tax neglects the effect of conveying to the grantee all the then existing legal or refuses to pay the same after demand, the amount (including or equitable rights of the grantor in the property described.4 any interest, additional amount, addition to tax, or assessable The IRS has challenged such quitclaim transfers under its thepenalty, together with any costs that may accrue in addition ory of nominee liens. The Internal Revenue Manual states: “A thereto) shall be a lien in favor of the nominee situation generally involves United States upon all property and a fraudulent conveyance or transfer rights to property, whether real or of a taxpayer’s property to avoid le“In reaching administrative personal, belonging to such person.” gal obligations.”5 There must be adA federal tax lien may only attach to equate consideration (or payment) decisions the government can property in which a delinquent taxfor any transfer to overcome such a payer has rights. challenge, or the IRS may proceed to 12 consider hearsay evidence.” To determine whether a taxcollect against a third party’s assets. payer has rights to property under In such a case, the third party does the federal tax lien statute, courts not have the same rights as a taxpayer must look to state law.1 The federal tax lien statute does not to due process under the Internal Revenue Code. The third create property rights, but may attach consequences to those party must take the costly action of suing the government in rights.2 The consequences in most cases are the rights to equity federal court to protect his or her property. interests up to the amount of the lien or balance due against For example, real estate was transferred to a spouse by quitthe property. claim deed. The spouse/transferee handled all expenses for the Under a “nominee” theory, the nominee must hold legal home, except the mortgage. She also handled a significant portitle to property for the benefit of someone else. The facts and tion of family expenses. Some years later, the spouse/transferor circumstances of each case are carefully reviewed to determine incurred tax debts. The IRS imposed a nominee lien upon the if a nominee situation exists, including: (1) a close personal transferee, whose only recourse was to sue to quiet title in fedrelationship between the nominee and the transferor; (2) the eral court. nominee paid little or no consideration for the property; (3) Adding a nuance to its arsenal, the IRS has attempted to the parties placed the property in the name of the nominee in bolster its nominee lien theory by adding a novel “lien tracanticipation of collection activity; (4) the parties did not record ing” component based on a very narrow finding in one case, the conveyance; and (5) the transferor continues to exercise do- Municipal Trust and Savings Bank v. U.S.6 The facts in that minion and control over property.3 The IRS is looking closely case involved an Estate taxpayer and a complex series of land at real property (most commonly) held by a relative of a tax transfers. Estate property was distributed when tax debts were debtor to determine if it can assert a nominee claim. due and owing, thus the U.S. was able to recover funds from One mechanism carefully scrutinized in these situations is the distributed assets. The limited case law in connection with the use of a quitclaim deed. The effect of a quitclaim deed is the government’s lien tracing theory deals mainly with nominee governed by state law, but in many states, a quitclaim deed has situations, or fraudulent transfers to avoid tax debts. Although 10 I F A L L 2 016

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“If the IRS deems any of the activity suspicious, it may freeze the account, assert all deposits are income to a taxpayer, assess tax, and levy the account immediately.” lien tracing seems like a stretch to reach assets, a cautious approach is warranted in these types of situations.

Jeopardy and Termination Assessments

Another extraordinary power of the IRS whereby it may take an individual’s property or money, based on suspicion and assumptions, is its ability to make “termination”7 and “jeopardy” assessments. If the IRS chooses to take this action, and it withstands any appeal, the tax is immediately due and payable.8 These procedures can be used to freeze bank accounts, take funds from the taxpayer, and file liens against a taxpayer’s property. All of these procedures may irreparably damage a taxpayer, as we have seen. For example, a bank may note suspicious activity in an account, as evidenced by large deposits from overseas. Such activity may be investigated by internal bank specialists, who may then report the activity to the FBI or Homeland Security, and the IRS. If the IRS deems any of the activity suspicious, it may freeze the account, assert all deposits are income to a taxpayer, assess tax, and levy the account immediately. Even if an individual claims a business purpose for the deposits, the IRS may take this action if it meets a very low standard of “reasonableness.” The code provision that allows this action9 focuses on the reasonableness of the IRS assessment. The standards to be employed by the reviewing court in determining whether the government has met its burden of proof, and that the making of a termination assessment is reasonable are: 1. Whether taxpayer is or appears to be planning to quickly depart from United States to conceal himself. 2. Whether taxpayer is or appears to be designing to place his property beyond the reach of the government either by removing it from the United States or by concealing it, or by transferring it to another person, or by dissipating it. 3. Whether taxpayer’s financial solvency appears to be imperiled. Further, under IRC §7429, a court must consider whether the amount of assessed tax was appropriate, under the circumstances. The method for calculating the tax must not be irrational, arbitrary and completely unsupported. The government need only establish that the taxpayer’s circumstances appear to be jeopardizing collection of a tax, not that they definitely do so.10 Straying from the Federal Rules of Evidence, a challenge in court is a “summary” proceeding, and the court may consider hearsay.11 In broadening the reach of this statute, a federal judge determined “Plaintiff also argues that the IRS, in making the jeopardy assessment, considered evidence that could be inadmissible hearsay at trial and that therefore no value should

have been given to that evidence. We find no merit in this argument. In reaching administrative decisions the government can consider hearsay evidence.”12 The reality in these cases is the IRS has a very low burden to meet in order to have a termination assessment sustained. It only has to be a “reasonable suspicion.” There are cases, however, when the “suspicions” are false, and even when the IRS knows they are false, a court may let the assessment and collection stand, and force a taxpayer to challenge the assessment in a refund or Tax Court proceeding, another costly endeavor, by which time a taxpayer may be out of resources to fight the government.

In Summary

The IRS has powerful tools at its disposal as it seeks to collect taxes. Tax professionals should be aware of these tactics, and resources to defend third parties and unsuspecting individuals when faced with such actions. 1. U.S. v. Towne, 406 F. Supp.2d 928, 932 (N.D. Ill., 2005) 2. Id. 3. IRM 5.17.2.5.7.2 (03-27-2012) 4. In re Blair, 330 B.R. 206, 211 (Bankr.N.D.Ill. 2005) 5. IRM 5.17.2.5.7.2 (03-27-2012) 6. 114 F.3d 99, 101 (7th Cir. 1997) 7. IRC §6851 8. Laing v. U.S., 1976-1 C.B. 388, 423 U.S. 161, 96 S. Ct. 473, 46 L. Ed. 2d 416, 76-1 U.S. Tax Cas. (CCH) P 9164, 37 A.F.T.R.2d 76-530 (1976). 9. IRC §7429 10. Cantillo v. Coleman, 559 F. Supp. 205, 83-1 U.S. Tax Cas. (CCH) P 9268, 51 A.F.T.R.2d 83-684 (D.N.J. 1983); Hecht v. U.S., 609 F. Supp. 264, 88-1 U.S. Tax Cas. (CCH) P 9160, 56 A.F.T.R.2d 85-5580 (S.D. N.Y. 1985). 11. Balaguer v. US, 656 F.Sup. 383 (United States District Court, D. Puerto Rico, 1987) 12. 5 U.S.C. § 556(d); Richardson v. Perales, 402 U.S. 389, 407–08, 91 S.Ct. 1420, 1430, 28 L.Ed.2d 842 (1971); Sears v. Department of the Navy, 680 F.2d 863, 866 (1st Cir.1982)

CPE

Related CPE Quiz on Page 29

Kathleen M. Lach is a Partner in the Tax and Litigation Departments of Arnstein & Lehr LLP. She represents clients before a variety of different tax authorities, including the Internal Revenue Service, the Illinois Department of Revenue, and the Illinois Department of Employment Security. Manage, Enhance and Expand Your Practice F A L L 2 016 I 11

The PC Industry Needs to Evolve or Prepare for Extinction

PCs are on almost every desk in the world and the installed base is measured in the hundreds of millions. Brian Krzanich, Intel’s latest CEO, recently announced a massive layoff tied to the company missing its quarterly numbers. The trend is clear. For the last two years, PC sales have been on a downward slide like never before. Unless the manufacturers of those PCs begin stepping up their innovation, the problem is going to get a lot worse. Here is a summary of the issues facing the PC industry: • Microsoft’s efforts at new versions of Windows haven’t affected demand in any meaningful way. • Tablets and smartphones are getting faster with more memory with every passing iteration. • Tablets, two-in-ones, and smartphones have usurped many of the tasks traditionally assigned to the PC. • Today’s PCs are lasting longer, and as solid state drives replace hard drives, that lifespan will get even longer. • People are finding they can live without a PC (some 20% of millennials don’t have a PC at all). The industry seems to vacillate between getting it (when some of the players liquidate their PC manufacturing facilities) and believing that it’s just a little blip in demand. Everyone has their cause for why the problem is getting worse. Remember those who pointed to Windows Vista and then Windows 8 as the cause? Then it was the iPad, but now tablet sales in every segment but the enterprise are on the decline. Windows 8 got replaced by Windows 10. While it was well received, it didn’t fix the problem. While PC original equipment manufacturers (OEMs) seem to be very bad at it, PC makers also need to become better at selling PCs. Look at other products. Cars today sell largely on status. Most of the models sold have a 10-year lifespan but we buy the new ones because a new car is a signal to everyone that the buyer is successful. The auto industry almost died in the 70s when each major player seemed to forget that. Today, one of the product lines that is selling very well is the Microsoft Surface. The fact that Apple had to respond with a gigantic iPad Pro showcases how successful the Surface has been. The Surface products look good, are very well marketed and do convey status. TV companies advertise TVs and move them. Car companies advertise cars and move them. Phone companies advertise smartphones and move them. For the most part, PC manufacturers don’t advertise their PCs aggressively– and certainly don’t connect them to status.

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PCs are lasting longer, "andToday’s as solid state drives replace hard drives, that lifespan will get even longer.

Technology TBD Advisor Advisor Rick Richardson, CPA, CITP, CGMA But, you ask, how about two-in-ones? The issue here is they seem to provide a feature that most people don’t want to use. The vast majority of buyers use them solely as notebooks, not tablets; much like the vast majority of iPad users use iPads as tablets and not notebooks. For two-in-ones to work, the industry needs to address the fact that folks don’t use them as tablets. The tech industry can see what causes products to move all around them. They can see, even in their own companies, why people are not getting new PCs. They have seen other industries fix problems like this. They just ignore it and come to a conclusion folks don’t want PCs anymore, even as they look around and see PCs on every desk around them. What should PC makers do to survive? They’re going to have to innovate and evolve. For far too long the hardware side of the industry has been relying on Microsoft to create demand by releasing newer versions of Windows. Microsoft, to its credit, is working hard to add new features to Windows that bring new things to the table for both home and enterprise PC users. Features such as Cortana and Windows Hello give PC OEMs an opening to craft systems that are designed to take advantage of what Windows 10 has to offer, but so far we’re not seeing many take advantage of that opportunity. The PC, as it currently stands, has come to the end of the road.

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

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Manage, Enhance and Expand Your Practice F A L L 2 016 I 13

Expanding Your Firm with Tax Resolution "

Tax resolution is a fascinating way to expand your firm as long as you don’t overpromise expected results. CPAs are in a unique position along with attorneys and EAs. As CPA Dan Henn describes it, “Tax resolution is when they [taxpayers] haven’t filed or owe a lot or both.” There is a greater need for adequate client representation before the IRS because of the proliferation of correspondence audits and horror stories about dealing with an understaffed IRS. “We deal with other issues first, file the unfiled returns, pay or get on payment plan, and then ask for penalty abatement,” Henn said. “Say, a client owes over $100,000 from 2006. After filing the financials, he may owe $300 a month, but will only owe for a maximum of 10 years from the date of the return. Then it is uncollectable.” Gaining first-time penalty abatement (FTA) is determined by your client’s qualification. You need three good years. You write a letter asking for the abatement. It is a case-by-case basis. Some agents approve, some don’t. You need a really good excuse. There are reasons the IRS will allow due to reasonable cause, medical, gambling, bad advice. “Another client may owe $250,000 from 2004 with no money to pay,” Henn said. “He may be put into ‘currently uncollectable status,’ which the IRS is supposed to check every year but doesn’t always. “With a partial pay agreement they are supposed to review every two years, but may not, due to the staffing burden at the IRS. [Taxpayer] must file at least the last six years, unless a substitute for return is filed for them by the IRS. The clock starts ticking after you file the return and the liability is assessed. This establishes the clock ticking over the ten years. You could be audited and get a whole new clock based on the liability of the audit. The ‘substitute for return’ prepared by the IRS is almost never accurate. The clock on your ability to amend and the IRS ability to audit is three years.” You file Form 433 and provide the income and expenses of the taxpayer. You then determine the value of assets and liabilities or judgments against the taxpayer. Software helps prepare these by providing a survey of the taxpayer’s financials and saves time by populating the form. “It takes patience,” Henn said. “Even the practitioner hotline can keep you on the phone two hours and torture you with a polite disconnect. You can file an amendment. If agent is not cooperative then you can escalate to the manager. If no satisfaction 14 I F A L L 2 016

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Part of the engagement is to determine reasonable collection potential (RCP) which determines taxpayers’ ability to make a payment.

Tax Tips Advisor T. Steel Rose, CPA

can be found there then you can file an appeal. “It is rarely useful [for the taxpayer] to talk with the agent. Taxpayers get nervous and become chatty-Cathys. Then, the IRS asks more questions, and person becomes irritable and that doesn’t help his case.” An Offer in compromise (OIC) is not the primary way to get satisfaction in tax resolution. Part of the engagement is to determine reasonable collection potential (RCP) which determines taxpayers’ ability to make a payment. “They [the IRS] give you a financial rectal exam,” Henn said. “They verify what you say is true from court records and could drive by your house to see the house and cars you drive. Once they establish liability then the IRS can come after you.” If a client can pay it all, and it’s guaranteed to be under $10,000, it can be done online without help and without financial statements. “If say you owe $50,000 and only have $15,000 you may be an offer in compromise candidate,” Henn said. You must stay compliant for five years going forward paying all taxes and filing all returns. If you are close to the end of the statute of limitations, you may be better off waiting rather filing an OIC. “As an advisor you must ask everything, even ask if client is inheriting money,” Henn said. “The IRS is entitled to 80% of any asset you own, including your house and inheritance. The IRS would take the inheritance in a Vanguard account.” Therefore, an OIC may be the better alternative. “For the OIC the IRS must do their due diligence,” Henn said.

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

Tax Resolutions, Scams and Scandals BY STEVEN V. MELNIK, CPA, LLM

ax scandals have plagued the United States in the last decade. Taxpayers and organizations have been victims of tax scams both by tax resolution firms as well as the IRS. In order to avoid being a victim of either, it is important tax payers understand their rights and what representatives and the IRS can and cannot do. Knowing and understanding them will set up safeguards to prevent being enveloped in a tax resolution scandal. In the last decade, major tax resolution firms have been sued by taxpayers and state authorities for allegedly misrepresenting their ability to resolve IRS tax debt, and for some, this resulted in the company going out of business. J.K. Harris & Co. was founded by CPA John K. Harris in 1997 and became the largest tax resolution firm in the United States. This firm has been sued several times by taxpayers. In fact, in 2007, it settled a class action suit filed in the South Carolina Circuit for approximately $6.2 million. Then in 2008, J.K. Harris also settled a suit with several Attorneys General of 18 different states for approximately $1.5 million. Roni Lynn Deutch, a Professional Tax Corporation, was founded in 1991 by Tax Attorney Roni Lynn Deutch, LLM. In 2007, the New York City Department of Consumer Affairs brought suit against Deutch in which the firm settled by agreeing to pay $200,000 restitution to consumers and $100,000 in fines to the City of New York. Then in 2010, then California Attorney General Jerry Brown, and now Governor of California, filed suit against Deutch in California Superior Court in the County of Sacramento for $33.9 million in civil penalties and restitution to taxpayers, and a permanent injunction. Deutch then publicly announced that her firm would be closing in May of 2011. TaxMasters Inc. was founded by CPA

Patrick Cox in Houston, Texas. In 2010, it was sued by the Texas Attorney General on behalf of over 1,000 taxpayers. The Attorney General of Minnesota filed suit against TaxMasters for allegedly misleading Minnesota residents about its ability to reduce their tax debt and for making unrealistic promises. Each of these firms had an “F” rating with the Better Business Bureau. Each was high-profiled within the media. Each did extensive promotional advertising. And each bamboozled many thousands of taxpayers.

Identifying and Selecting Competent Tax Resolution Professionals

“lawsuit,” “problems,” “scam,” “fraud.” Read everything. It’s consumer beware.

2. Do not believe a tax resolution professional who makes promises or guarantees. The only thing a tax resolution

professional/company can guarantee is that they will do their best or put forth the best effort on the case. Tax resolution professionals and companies cannot promise or guarantee an outcome because the final determination is made by the IRS. They cannot guarantee the taxpayer will qualify to settle debt for less, or that they can stop IRS collections.

3. Do not believe the success rates reported by tax resolution professionals It is important to remember that if some- without conducting independent rething sounds too good to be true, it usu- search. Be fully aware that the success of ally is. Prior to determining eligibility for a settlement, the firm must ask questions about income, expenses and assets. If these questions are not asked, the only eligibility would be for a Streamlined Installment Agreement assuming the taxpayer owes $50,000 or less. Selecting a reputable tax professional can save from more than the stress of dealing with the IRS; it can save time and money. Below are tips for selecting a reputable tax professional:

one case does not guarantee the success of another. Reputable tax resolution professionals will not disclose their success rate or indicate that their success on another case guarantees the success on a new case.

4. Do not pay unreasonable fees. Most

tax resolution professionals will charge a flat fee for their services. Typically, the cost may vary with the service. All fees should be reasonable. One way to tell if the fees are, in fact, reasonable is by researching how much other tax profession1. Investigate the reputation of the tax als charge for the same service. Discuss the resolution professional. If the tax reso- case with other tax professionals prior to lution professional/company has deroga- choosing one. tory remarks about it or has been sued before by taxpayers and has lost, this is This article is continued on an indication of a tax scam. A reputable www.CPAmagazine.com. tax resolution professional/company will have great rapport with clients as well as other tax resolution professionals/ companies. A starting point in your re- This is an excerpt from Tax Relief and Resolution search may be the Internet, or the Bet- by Steven Melnick, CPA. Melnick is a licensed attorney, LLM in Taxation. He is also a professor ter Business Bureau. On the Internet, of tax law, and a Chairman of Continuing do a Google search with the company’s Education Programs for Tax Professionals at the name followed with: “complaint,” “con,” City University of New York. Manage, Enhance and Expand Your Practice F A L L 2 016 I 15

√ CHECKLIST: 1040 Planning Idea By Martin M. Shenkman, CPA, MBA, PFS, J.D.

√ MULTI-GENERATION CRT

Blended families are common, perhaps the norm (only about 20% of family units are comprised of traditional intact families). For many of these clients portability solves any estate tax concerns. The real issue is planning to protect children of a prior marriage, the current spouse and doing so when the primary estate asset is an IRA. A multi-life charitable remainder unitrust (CRUT) can provide an approach that addresses these planning challenges. The IRA can be bequeathed to a CRUT that initially benefits the surviving spouse and mandates a 5% payout. Following the death of the surviving spouse the CRUT continues for the named children of the prior marriage paying them 5% for life and on their demise the remainder passes to a qualified charity. Thus, the IRA provides for the spouse to support her for life, and then passes the benefits to the children after her death, all in an income tax efficient manner. Use of CRTs for IRAs of non-taxable estates was a concept probably many had not considered. This can provide a valuable and better approach than the traditional credit shelter trust when the primary asset is an IRA.

√ SINGLE MEMBER LLCS

Real estate values have grown substantially in recent years so it is likely practitioners will see more clients considering donations of appreciated real estate. An issue many real estate donations raise is the donee charity’s concern about potential environmental risks. In some cases appropriate due diligence can be done before the donation is contemplated, but this is not always feasible. What can be done? The donee charitable organization may accept the contribution of donated property in the name of a single member LLC. This will enable the charity to insulate itself from any potential environmental liability associated with the property by confining that risk inside the single 16 I F A L L 2 016

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member LLC. This will not jeopardize the donor’s income tax deduction. Notice 2012-52, 2012-35 IRB.

√ INVENTORY

Charitable contributions of inventory are only deductible up to the income tax basis of property. Clients, especially those with informally run closely held businesses, not realizing this limitation may donate unneeded business property and simply list it as another non-cash contribution. IRC Sec. 170(e).

√ BEQUESTS

Many clients do not face an estate tax so a bequest to charity will provide no tax benefit. Consider having the bequest paid in advance of death so that an income tax deduction may be realized. Be certain to have the charity sign a written acknowledgement that the gift is an “advancement” of the bequest to avoid the client being held responsible twice.

√ ADD CHARITY TO BYPASS TRUST BENEFICIARIES

It has not been conventional to permit charitable gifts from a bypass trust, since the goal historically has been to maximize the assets outside the surviving spouse’s estate. Instead charitable bequests could be made by the surviving spouse or from the estate of the surviving spouse to garner an estate tax charitable deduction. However, the new tax paradigm might provide an incentive to rethink this traditional approach. If the family unit has charitable giving objectives, then selecting the optimal source from which to fund those charitable gifts could maximize the overall tax benefits of the contributions. The bypass trust might be in a higher income tax bracket than any family member so that distributions to charity may provide the biggest tax bang for the buck. Further, if the family unit will be making charitable donations in any event, using

highly appreciated assets inside a bypass trust to fund charitable bequests may be a cost effective and simple means of avoiding future capital gains taxes without the risks associated with general powers or other approaches.

√ DEFINED VALUE MECHANISM

These have become common in estate planning for large estate planning transactions such as sales to grantor trusts, distributions in kind from GRATs, etc. When structuring such transactions the optimal spillover receptacle is a charity. If a charity is named it involves a third party that helps give support to the validity of the overall transaction. Public policy should also seem to favor protecting a potential gift to charity.

√ CHARITABLE LIMITATIONS

Contributions, reported on Form 1040 are deducted on Schedule A (below-theline deductions) and are subject to the 50%, 30%, or 20% of adjusted gross income (AGI) limitations. In contrast, however, on a Form 1041 for a complex (non-grantor) trust the charitable contribution deduction is reported abovethe-line and there are no percentage limitations. This is because the trust is governed by IRC 642(c) instead of IRC 170. So charitable trusts can provide a significant income tax advantage over individuals making a comparable donation. This article is continued on www.

CPAmagazine.com.

CPE

Related CPE Quiz on Page 29

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

Tactics to Use When Preparing 1040s

Be Alert for Digital Documentation

Now that companies are going digital, many W-2s and Form 1099s are available digitally. This is a blessing since they may be more readily available when they are needed. However, it puts a bigger burden on you to assure you have all of the information when preparing a tax return since it may not be in the stack of information provided by your client. A good practice is to watch for documentation from payors listed on the prior year return and ask the client about any new bank and investment accounts.

Learn the Theory By Preparing Tax Forms By Hand

Does anyone really prepare tax returns without using tax software anymore? There are so many complexities and computational issues to consider when preparing tax returns, that using tax software is almost a necessity. However, to gain a real understanding of a concept, actually preparing a few of the forms “by hand” provides you more insight and a better understanding of the law in that area. Take Form 8960 for the net investment income tax as an example. The tax software will plug numbers in for you. However, you really need to read the form and understand all of the adjustments and exclusions to calculate the proper tax and keep clients from paying unnecessary amounts. Even preparing a Schedule D for capital gains and losses manually helps you understand the netting process and how any capital loss carryovers work. Really understanding how the form works generally helps you understand the law. This in turn helps you to be able to understand planning issues and make recommendations to your clients for minimizing taxes. However, preparing the actual tax returns using tax software is highly desired, especially since many tax software packages will provide helpful hints and diagnostics of items needing more attention.

Reconsider Filing Status and Exemption Deductions

Filing married, filing separately rather than jointly, filing as head of household rather than single, or letting a child claim the dependency exemptions may reduce the family’s overall taxes. • If a married couple has significant medical expenses subject to the 10% of adjusted gross income (AGI) floor or unreimbursed employee business expenses subject to the 2% of AGI floor, filing separately may reduce the overall tax by lowering the floor for deductibility. A couple with $100,000 of AGI and medical expenses of $7,000 receives no tax benefit from their medical expenditures due

If the spouse who incurred the “medical expenses had $30,000 of AGI, then that spouse could deduct $4,000 ($7,000 – ($30,000 x 10%)), saving the couple over $1,000 in tax.

”

Tax Client Advisor Julie Welch, CPA, CFP

to the $10,000 ($100,000 x 10%) floor. If the spouse who incurred the medical expenses had $30,000 of AGI, then that spouse could deduct $4,000 ($7,000 – ($30,000 x 10%)), saving the couple over $1,000 in tax. • Head of household filing status does not require that one be a single parent. Providing over half the housing costs of a parent who does not live with the client or over half the costs of most dependent relatives who live with the client for more than six months is enough to obtain the increased deductions, lower tax rates and higher phaseouts allowed to head of household filers. • If the AGI is over $155,650, a client may be receiving a reduced benefit from the exemption deduction for their children, and the client is receiving no benefit from the education credits the government allows. If the child provides over 50% of his or her support, allowing the client’s children to claim their exemptions, particularly if they are in college with over $15,000 of earned income, may increase the family’s overall cash flow. Additionally, this may help their higher education financial aid opportunities. Taking advantage of these strategies requires thinking now about who should pay the medical or college costs, how much a child needs to earn and how much support needs to be provided to exceed the 50% requirement for the exemption deduction.

This article is continued on www.CPAmagazine.com.

Julie Welch (Runtz) is the Owner of Meara Welch Browne, P.C. She graduated from William Jewell College with a BS in Accounting and obtained a Masters in Taxation from the University of Missouri-Kansas City. She serves as a discussion leader for the AICPA National Tax Education Program. She is co-author of 101 Tax Saving Ideas. Manage, Enhance and Expand Your Practice F A L L 2 016 I 17

“When an attorney agrees to represent an individual on a contingency basis and there is a recovery, the individual is taxed on the entire award .“ Tax Strategies for Windfalls

Continued from page 6 when installments are received (Code Sec. 451(h)).

Tax Strategies for Offsetting Windfall Income

If a windfall is taxable, there are steps that can be taken to minimize taxes.

Business IPO and Buyouts Entrepre- Income-Splitting Income splitting is a neurs may make it very big, taking their companies public or selling to new owners. While not necessarily thought of as a windfall because it may be years in the making, the resulting money from the deal presents similar challenges to these individuals. Going public does not result in any immediate tax consequences for the owner. His or her holdings merely become more valuable. The sale of a business usually results in capital gains for the owner. However, asset sales (as opposed to stock sales) may trigger some ordinary income; ordinary income results from the sale of ordinary income property (e.g., inventory).

Whistleblower Awards The govern-

ment pays for information that leads to recoveries for fraud in Medicaid, government contracting, banking, taxes, public securities, and more. For example, there are two types of whistleblower awards from the IRS (Some of these are whistleblower awards where the government pursues information provided by individuals and then shares the recovery. Others are qui tam awards for private persons who bring an action on behalf of the government. These awards can be in the millions of dollars. For example, an SEC award to an individual in June 2016 was more than $17 million. Individuals receiving whistleblower awards have argued they are capital gains, but the courts have routinely treated then as ordinary income (see e.g., Patrick, 142 TC 142 (2014), affirmed CA-7, 2015-2 USTC ¶50,454)), where the courts rejected the taxpayer’s argument that he sold information and that his recovery was a capital gain). Attorneys’ fees relating to whistleblower awards are deductible from gross income (Code Sec. 62(a)(21)). 18 I F A L L 2 016

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strategy in which income is shared so that it is taxed among several people. For example, if there is a winning lottery ticket, reporting multiple owners of the ticket spread the resulting income accordingly. However, when trying to spread income in the family, the person holding the winning ticket must be able to show there was an agreement or arrangement in place to share the prize before the winning number was picked; otherwise it is only an attempt by the winner to shift some of the tax burden to others. In the spirit of shifting income, an individual may give cash or property to a family member so that resulting income is taxed to the recipient. For example, an individual who is providing support to a parent may give dividend-paying stock to the parent so the parent collects the dividends and then uses them for his/her support. There are two considerations here: (1) federal gift tax rules that may influence the size of the gift and (2) the tax situation of the recipient. Income shifting, for example, will not work well for a child who is subject to the kiddie tax because such income is effectively taxed to the child at the parent’s marginal rate (i.e., no tax savings for the family).

Charitable Contributions

Someone receiving a windfall is in a position to give generously, and take a charitable contribution deduction (Code Sec. 170). With large windfalls, setting up a charitable foundation may make sense to enable the person to obtain sizable tax deductions upfront and oversee the disbursement of the funds for favored charitable purposes.

Withholding and Estimated Taxes

Some windfalls (e.g., gambling winnings, lotteries) are subject to automatic withholding. Most others are not. It is up to the individual to ensure that sufficient

estimated taxes are paid on a taxable windfall to avoid estimated tax penalties.

Long-Term Impact of a Windfall

When an individual receives a windfall, likely there is a need for comprehensive financial and estate planning. Here are some tax-wise considerations: • What investments should be made with the windfall? Some windfalls may need to be invested safely in liquid assets (e.g., a windfall needed for future medical costs). In other cases, an individual may want to invest for growth or tax-free income. For example, municipal bond holdings may be more attractive than taxable investments because the windfall recipient has been pushed into a higher tax bracket. • Is there a concern about death taxes? For example a windfall can mean that the person’s gross estate will be larger than the federal exemption amount ($5.45 million in 2016) and subject to estate; the tax may be minimized or avoided with estate tax planning. State death tax exemptions must also be factored into estate planning.

Conclusion

Practitioners who have clients that receive windfalls can provide valued advice on handling the newfound wealth. Consider not only federal income tax implications, but also state and local taxes. The American Bar Association has an article about advising clients who win a lottery (http://www. americanbar.org/content/newsletter/publications/gp_solo_magazine_home/gp_solo_ magazine_index/gerstner.html).

CPE

Related CPE Quiz on Page 29

Executive Editor Sidney Kess is CPA-attorney, speaker and author of hundreds of tax books. The AICPA established the Sidney Kess Award for Excellence in Continuing Education in his honor, best-known for lecturing to over 700,000 practitioners on tax. Kess is Senior Consultant to Citrin Cooperman & Company and Counsel to Kostelanetz & Fink.

Identity Theft: Response Plan BY T. STEEL ROSE, CPA WITH JOSHUA FLUEGEL

n this information age, identity theft is no longer something you merely hear about on the news in the evening. Most people know someone who has had either a credit card T. STEEL ROSE fraudulently opened in their name, checks stolen and used or a social security number compromised. Clearly identity theft is everywhere. I have a friend who had his 1040 stolen from his mailbox. Trust me, it did not make his tax season go any smoother. No one is safe. As a CPA, you are a client’s trusted financial partner. Not only do you have a responsibility to protect all information a client gives you but you are also their consultant in many financial matters. Therefore it is likely that upon having their identity stolen a client will come to you asking what the next steps should be.

• TransUnion www.TransUnion.com/fraud • Equifax www.Equifax.com/CreditReport Assistance A 90-day fraud alert is a free service offered by all of the credit bureaus. According to the Federal Trade Commission, once a 90-day fraud alert has been activated with one of the credit bureaus, protocol dictates that they contact the other two creating a web of caution.

“Not only do you have a responsibility to protect all information a client gives you but you are also their consultant in many financial matters.”

Step 1

Instruct your client to contact the companies or organizations where the fraud has occurred. As the thief used the identity to patronize these establishments already, putting the companies on high alert will disrupt the thief’s established patterns. This will also help stop the results of identity theft from growing systemically. This step also involves changing passwords and PINS, refreshing cards and adjusting security measures.

Step 2

You will then need to contact, or have your client contact, the credit bureaus to activate a 90-day fraud alert. The three credit bureaus worth contacting are: • Experian www.Experian.com/fraudalert

Step 3

Your client will then want to go to www. IdentityTheft.gov to file a report with the Federal Trade Commission. Your client will be guided through several steps of creating an account and filling out the appropriate forms. Advise your client to provide as many details as possible.

Step 4

The next thing to do would be to file a police report. The police will need the following items to complete the report: • A copy of the Federal Trade Commission Identity Theft Affidavit. • A government-issued ID with that person’s picture on it. • A proof of address. This can be an

item such as a utility bill or mortgage statement. • Any proof your client may have of the identity theft such as bills or notices. • The Federal Trade Commission’s memo to law enforcement available at www.IdentityTheft.gov/steps. Your client should also ask for a copy of the police report for their personal records. Once the spread of financial damage has been stopped, you must then help your client pick up the pieces. This involves closing new accounts fraudulently opened in your client’s name, removing fraudulent charges and correcting the credit report. Steps detailing this process can be found at www.IdentityTheft.gov. This information and more can be found at CPAMagazine.com as part of the Technology Minute. The Technology Minute is a video series produced by the staff of CPA Magazine covering technological issues CPAs encounter on a daily basis in their tax practices. The Technology Minute series also features interviews with some of the top minds in tax to elaborate on the current status of technology, where it is going and what it means for CPAs. If you would like to suggest topics for the Technology Minute or be featured in a video, contact CPA Magazine at josh@cpamagazine.com.

Technology Minute

VIDEO SERIES

CPA MAGAZINE.COM

SEE PAGE 27 FOR FULL LISTING

Manage, Enhance and Expand Your Practice F A L L 2 016 I 19

CPA Profile

BY JOSHUA FLUEGEL

Finding and Maintaining New Clients

ndividuals and businesses put great thought into what must be done to preserve income from the government. Lest the world forget, tax professionals are Emily Sang making sure citizens are receiving their share of their income and defending them from the often-intimidating IRS. This issue of CPA Magazine we shine the CPA Spotlight on Emily Sang, CPA. On top of 1040s, 1120s and trusts, Sang’s practice works with real estate and not-for-profit. CPA Magazine talked with Sang about how her firm navigates tax season and what she recommends fellow tax professionals do to expand their client base.

How did you get into accounting/becoming a CPA? It was because my mom was a CPA. She worked in the accounting field for many years and she taught me when I was growing up the basics of debit and credit. What is a technology that helps you a great deal during tax season? I actually use the Google Calendar scheduler. There is a document manager I use where I scan documents and it automatically loads into the document manager under a specific folder that I create. A lot of times email has a hang out function. We will collaborate using Google Hangouts and do group teaching. What is a tip you would give for marketing your CPA services? I think everything goes with marketing. I love meeting new clients. I love meeting new people. For example, during tax season I get evites from different groups, either 20 I F A L L 2 016

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community events or some kind of association; and they need someone to give a presentation on tax basics to their members. I would say any time you get an invitation to those events, participate in them and provide the attendees upfront value and do not sell them anything. Usually I will gain clients organically. I don’t do much internet marketing although I am working on increasing my business’ online presence. I do get a lot of referrals from clients and I do enjoy working with them because the best clients you can get are people who already know who you are. When you work with them they are very open to your advice. I would say just focus on meeting people, number one. And number two, focus on providing excellent service to clients. What if you are a new CPA? How do you get invited to events? Actually there are lot of events hosted by CalCPA, for example, and also there are non-cpa related events. I go to a lot of non-business related events like charitable events. That way you can join a cause that does a lot of good things for the community and the people remember you. You get your good deeds done and potentially have more people who like to refer you. I think any event would be very beneficial. If I get an invitation I make time and really try to go. Entertainment events like birthday parties or hiking events also work. I don’t really have to advertise that I am a CPA. It’s very funny, people always consider you for themselves or refer you to a potential client. I think it’s because CPA is a very practical profession.

What is something that would guarantee failure during tax season and how do you prevent it? I would say most CPAs are probably good with their professional expertise of helping clients. However, number one would be not getting back with your clients on time or at the time you promised you would. I know I have my share of difficulty getting back with clients in a timely manner but my number one pet peeve is not getting back with my clients when I wanted to. You have to put your clients on the calendar. Set a date for next time you can meet or deliver the returns. Also, try to help your clients right away to avoid creating a backlog. If for any reason you cannot get to them, have another person help on a contract basis. The person needs to be someone you can trust and you must review their work to make sure it is done to your satisfaction. At the end of the day it’s your name on the signature line, right? Number two is not being organized with all your clients regarding billing, progress and who’s working on what. If you do not have a really good way of tracking your clients’ progress then some people are going to eventually be left out and that could eventually backfire on you. I would say get on top of your administration. It is ideal if you can hire someone to handle administration, even on a part-time basis. What would you say was one of the most influential moments in tax in the past 15 years? Based on my personal experience I just love the idea of being able to be anywhere and at any time be able to help your client using technology. One year I was in Costa Rica and I was helping my clients up until the deadline, April 15. The convenience created by technology has made my life much, much easier. What do you like to do in your free time? I truly say I really enjoy what I am doing. I don’t feel like I’m working, I feel like I’m constantly doing things I love. I travel, of course I’m sure everyone loves to travel.

The Pitfalls of the At-Risk Rules for the S Corporation Shareholder BY LEWIS TAUB, CPA

hareholders of an S Corporation that has a loss from operations are often concerned with whether or not they have basis in the stock and debt in order Lewis Taub to use this loss on their tax returns. A critical issue that is often not considered is whether shareholders have a sufficient amount at risk with regard to the loans made to the S Corporation. Both the basis rules and the at-risk rules must be met in order for a shareholder to deduct business losses from an S Corporation. This article will address certain key elements of the at-risk rules which are contained in Section 465 of the Code. Section 465(c)(3) states that for tax years beginning after December 31, 1978, the rules of the section apply to each activity engaged in by a taxpayer in carrying on a trade or business. Therefore, the rules apply to any S Corporation shareholder engaged in a trade or business. Often practitioners presume that the at-risk rules apply only to partnerships and therefore do not give the application of the rules to S Corporations sufficient consideration.

Contribution of Cash or Other Property

Sec. 465 states that a taxpayer is at-risk in an activity for the amount of money and the adjusted basis of other property contributed to the activity (Section 465(b)(1)(A)). If a shareholder contributes property that is subject to a debt, the amount at-risk depends upon whether the shareholder is personally liable for the repayment of the debt. If the shareholder is personally liable, the amount at risk is increased by the full amount of the property’s adjusted basis. However, if the shareholder is not personally liable, the amount at risk is increased by the adjust-

ed basis of the property contributed and directly from the bank to the S Corporadecreased by the nonrecourse debt (Prop. tion would not create basis. As a result, Regs. Sec. 1.465-23(a)). the back-to-back loan described above is often used to create basis. However, pracWhat About Loans From The titioners often neglect to consider the atShareholder to the S Corporation? risk issue. In order to avoid the claws of A very significant difference often arises Sec. 465, collateral other than assets used between a shareholder’s basis and at-risk by the activity must be utilized. It must amount with regard to loans made by a be noted that if the shareholder pledged S shareholder to an S Corporation. Section Corporation stock as collateral, the share1366 and 1367(b) provide that a shareholder would again not be at-risk. holder’s basis is increased by loans made to the S Corporation. However, under Exception for Qualified the at-risk rules of Sec. 465, these loans Non-recourse Financing might not increase the shareholder’s at- There is an exception to the at-risk issue risk amount. Section 465(b)(2) states discussed in the case of qualified nonrethat an S Corporation shareholder is at- course financing under Section. 465(b) risk only with respect to amounts bor- (6). A shareholder is at risk with regard to rowed for use in the corporation to the qualified nonrecourse financing that is: • Borrowed with respect to the activity of extent that the shareholder: holding real property; A) is personally liable for the repayment of such amounts; or (B) has • Borrowed from a qualified person; pledged property, other than property • Financing for which no person is perused in such activity, as security for such sonally liable for repayment; and borrowed amount (to the extent of the • Not convertible debt. fair market value of the taxpayer’s interest in such property). Borrowing from Persons Having Under item (A) above, if a sharehold- an Interest in the Activity er of an S Corporation borrows money This is another very significant trap for from a bank and lends those funds to the S Corporation shareholders. Under SecS Corporation, the terms of the note be- tion 465(b)(3) a shareholder is not at tween the bank and the shareholder will risk with regard to amounts borrowed determine the shareholder’s liability. from any person who has an interItem (B) applies when a shareholder est in the activity or from a person who borrows money from an unrelated party, is related to a person with such an inuses as collateral property of an S Corpora- terest. This article is continued on www. tion as security, and lends the funds to the S CPAmagazine.com. Corporation. This loan from the shareholder to the S Corporation gives the shareholder Related CPE Quiz on Page 29 basis in debt but does not increase his or her at-risk amount. Both tests must be met in order for the shareholder to be able to deThis is an excerpt from Tax Relief and Resolution duct the loss on their personal return. by Steven Melnick, CPA. Melnick is a licensed Company assets are often security for attorney, LLM in Taxation. He is also a professor a loan the shareholder takes out in order of tax law, and a Chairman of Continuing to loan funds to the S Corporation. The Education Programs for Tax Professionals at the shareholder’s guarantee of a loan made City University of New York.

CPE

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BUSINESS TAX COMPARISON CHART Company

Wolters Kluwer

Petz Enterprises, LLC

Drake Software

TaxAct

Thomson Reuters

Product

ATX

CCH ProSystem fx Tax

CrossLink

Drake Software

TaxAct Professional

UltraTax CS

Interview/Forms Entry

Yes

Batch Entry

Yes

Direct Trial Balance Import

Yes

Trial Balance Import

Yes

Import Shareholder Data

Yes

Export K-1 Data to 1040

Yes

C to S Corp. Conversion

Yes

S to C Conversion

Yes

Data Entry “Views”

Yes

Errors

Yes

Audit

Yes

Flags

Warning

Yes

Omissions

Yes

Overrides

Yes

Sch M. Reconciliation

Yes

Hyperlinks to Errors

Yes

Batch Return Printing

Yes

Batch K-1 Printing

Yes

Integrated Letter Editor

Yes

Mailing Labels

Yes

Multiple Printer Support

Yes

Customizable Worksheets

Yes

Batch

Yes

Customizable Client Letter

Yes

Client Billing

Yes

Billing by Form

Yes

Billing by Time

Yes

Mailing Labels

Yes

800-638-8291

800-739-9998

800-345-4337

828-524-8020

319-731-2682

800-968-8900

DATA INPUT

DIAGNOSTICS

PRINTING

BILLING FEATURES

TECHNICAL SUPPORT Telephone Number

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A Focus On Write-Up Software BY JOSHUA FLUEGEL

he completion of a client’s taxes incorporates many elements that must be orchestrated with precision. Much of this relies on a CPA’s ability to anticipate problems and variable elements. However, the use of software is a valuable asset that can be used to bring order to the potential chaos of statements, forms and procedures. Write-up software is one of those tools, combing bank and client info to produce accurate financial statements. There are many options available to suit any CPA’s style or skill set. Some of the industry’s leading vendors describe their write-up products and how they could help a CPA during tax season. “Payroll Relief’s Bank Feeds feature downloads transaction information from thousands of bank and credit card providers to automatically record all journal entries and update the Chandra Bhansali trial balance, which reflects on the financial statements,” said Chandra Bhansali, cofounder and CEO of AccountantsWorld. “This helps keep the financial statements current and accurate with minimal effort.” “They integrate using our bank reconciliation program and we have another report called the bank report, there are two different reports,” said Terry Gruters, president of PC Software Accounting. “They [CPAs] know for sure they are totally lined up with the bank.” CheckMark claims to help keep a CPA organized providing easy-to-read displays helping in the comparison to bank records. Such ability could provide relief for the eyes after running through thousands of lines of expenses. “The program allows CPAs to maintain accounting records for their clients, including sales, purchases, outstanding payables and receivables as well as inventory levels, and keep track of the constantly evolving financial picture of

their company,” said Mohammed Ghani, president of CheckMark. “When it comes time to reconcile the books with the bank statement(s), the CPA can view all relevant transactions in a comprehensive and easy-to-read format and confirm that their records are in line with what their bank reports. A client can also use the Bank Reconciliation feature to reconcile other accounts.” Assuming a CPA’s client portfolio is diversified, a versatile write-up solution would be most helpful. A write-up solution should be serviceable to every industry for Louie Calvin which a CPA serves. “It is important to have the flexibility to present clients with real-time, upto-date financials so that business clients are in a position to make more informed decisions,” said Louie Calvin, product manager - accounting and payroll at Thomson Reuters. “Write-up services are no longer valued after the fact, since clients expect to have access to financial indicators mid-period, or mid-month, in order to adjust strategy as needed. Firms that are positioned to offer clients realtime dashboards, KPIs and alerts can reasonably increase fees for their services and win additional customer satisfaction.” Those who might be staying with a particular vendor’s write-up solution would be well served to talk to a representative about recent updates. There is no sense in letting last year’s Ariege Misherghi complication reoccur when a patch or update is available to improve your write-up process. Intuit claims to have recently updated their reports feature. “QuickBooks Online Accountant recently updated its management reports feature,” said Ariege Misherghi, group

product manager at Intuit. “This lets accountants easily customize a professional-looking package of reports, complete with cover page, table of contents, preliminary pages, reports, end notes, and other custom content, for clients.” A CPA works with many technologies when compiling financial statements. It would only seem logical to make sure all software can “talk” to each other. UBCC claims to be able to import information from various locations and platforms. “UBCC’s write-up allows for direct import of check detail from the bank website and/ or from client supplied electronic sources such as credit cards, QuickKen Garen Books data files or Excel spreadsheets,” said Ken Garen, president and co-founder of UBCC. “Cleared check information can be imported from the bank data for automated bank reconciliation. Depending on the client’s needs, direct input of client supplied information can be mixed and matched with electronic imports and predefined client specific financial statement templates to achieve the greatest productivity.” Of course no process of evaluating write-up software beats trying the products out.

This article is continued on www.CPAmagazine.com.

WRITE-UP SOFTWARE COMPANIES AccountantsWorld CheckMark Intuit PC Software Accounting UBCC Thomson Reuters

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Preventing the Loss of Valuable Time BY JOSHUA FLUEGEL

CPA’s time is valuable. Keeping track of it, especially during tax season, is paramount in order to see a healthy return on investment for months of tireless efforts. Fortunately time and billing software can help a CPA keep track of where his or her day goes. “Time and billing software provides CPAs with information that supports preparation of federal, state, and local income and/or franchise tax returns - reducing return preparation time Curt Finch and the related fees for such services,” said Curt Finch, CEO of Journyx. “It facilitates the calculation and related accounting for labor costs that must be capitalized for tax purposes, labor costs associated with passive or otherwise separately reportable activities, labor cost components eligible for various tax credits, and payroll apportionment factors required for multistate tax filings.” “With tax season being so busy it’s easy for things to slide,” said Terence Cummings, vice president, sales at Sage Software. “Especially when it comes to tracking time. A few minutes Terence Cummings here or there might not seem like a big deal at the time. But if you do this a few times every day, think about how much time you’re not tracking and billing for by the end of tax season. Be sure you have a solid system in place to help you track all of your billable time.” “The use of time and billing software provides you the ability to apply a configurable workflow that allows your organization to review and approve the final details before submission for compliance purposes,” said Kevin Sequeira, general manager at Tenrox. 24 I F A L L 2 016

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Keeping track of time not only ensures you get paid but proper use of time and billing software also saves valuable minutes. “It’s helpful to keep the time and billing system open all day during tax season,” said Tom Dawson, president of TPS Software. “Everyone is very busy and working the hardest that Tom Dawson they do all year so requiring the extra step of opening the program to record either time spent or stage of the return is counterproductive. Always try to minimize the struggle to record. More will be recorded and the accuracy will be better if effort is kept to a minimum.” “Excel and Pen/ Paper tracking systems create additional work for you and your staff, and a lot of non-billable hours,” said Shafat Qazi, CEO and founder of Shafat Qazi BQE Software. “You need a time billing software that completely automates your processes and offers intuitive, easy to use time/expense capture tools.” Counting and managing time spent with various client tasks not only saves money but it finds the proverbial sweet spot in the revenue/expenditure matrix maximizing profit. “By tracking your time worked against billed and collected amounts you can see which of your hourly and flat fee clients are profitable over the short and long term,” said Michael Lipps Michael Lipps, managing director of business and litigation software solutions at LexisNexis. “Several time and billing

software applications have custom reporting options built into the system which can be used to tailor a report to meet a client’s specific needs. This not only helps clients more easily digest the information that is being presented to them, but shows they are a valuable partner to you.” “Invoicing your services at or close to the time they are provided will enhance cash flows and improve the likelihood that billing disputes are resolved in Fred Lindsley your favor,” said Fred Lindsley, president of ImagineTime. Time and billing no longer simply helps a CPA keep track of time spent filing taxes and conducting research but it now can tie all tax processing efforts together for the practice. “Get online now,” said Brian Saunders, CEO of BigTime. “If you’re thinking of a timesheet as just a history of time, or an invoice as just a vehicle for billing, then you’re missing the true power of cloud-based practice management. It’s more than just an online repository of timesheets, invoices and notes. Big data is on the verge of providing you with the practice management equivalent of “instant replay” (together with a virtual press-booth of data analysts).”

This article is continued on www.CPAmagazine.com.

TIME AND BILLING SOFTWARE COMPANIES BigTime BQE Software Chrometa HMS Software ImagineTime Journyx LexisNexis Sage Software Tenrox TPS Software

CHART COMPARISON CHART TIME & BILLING SOFTWARE PRODUCT

BigTime BQE Time Chrometa Control IQ Pro BillQuick

ImagineTime Practice Management Software

Journyx

Time Matters

Company

BigTime BQE Software, Software Inc.

ImagineTime, Inc.

Journyx

LexisNexis

Sage

Tenrox

TPS Software

HMS Chrometa Software

Sage Professional TPS Timeslips Services Premium Automation Software

GENERAL FEATURES User-defined screen forms

Yes

Integrates transactions to GL program

Yes

E-mail enabled (built into software or launched from software)

Yes

Integrate with Tax System

Yes

Multi-lingual support

Yes

Client & project budgeting

Yes

Percent complete flat fee billing

Yes

Contingency fee billing

Yes

Overhead cost

Yes

24-month billing history

Yes

Employee cost/budget comparisons

Yes

Provides warnings when fee/ expense entry exceeds amount quoted to client

Yes

CPE exception reports

Yes

License renewal reports

Yes

File labels

Yes

Barcoded file labels

Tax return labels

Yes

Address notebook pages

Yes

Rolodex cards

Deposit slips

Yes

Past-due notices

Yes

Number of standard reports

400+

Yes

100+

Yes

120+

100

300

Number of standard invoices

125+

Yes

User Security Restriction Level-Field, Record, Function, Module, all Practice management reporting

BILLING/BILL PREPARATION

REPORTING

User-definable employee database fields

Finding Perfection in Payroll Processing BY JOSHUA FLUEGEL

erfection is a goal only achieved through the painstaking process of determining problems and preventing them from reoccurring. Accordingly, the following payroll processing vendors present problems many of their users have had in the past accompanied with ways to identify and remedy them. For example, maintaining healthy standards of communication and understanding between CPA, client and software is an excellent way to strive for a perfect payroll. “This lack of understanding [of payroll software] and validation of accuracy can put the CPA at risk as there are several cases where the CPA is responsible for Chuck Gossett their client’s payroll taxes and possible penalties,” said Chuck Gossett, CEO of Cougar Mountain Software. “We believe the entire accounting department as well as external bookkeepers, auditors, and CPAs should be familiar with the accounting software which is being used…This involvement minimizes the exposure risk for CPAs and other parties.” “A major obstacle can be the time gap between the payroll specialist (CPA) and the client fulfilling their respective roles,” said Mohammed Ghani, president of CheckMark. “It is important that both the client and the CPA have access to all information either through a web portal or a cloud application.” Gathering data and maintaining the ability to share data among all software a CPA uses is an essential. A CPA can integrate every piece of software into a practice with all other currently used tools in mind. “One key potential problem with payroll processing software is with information gathering and management,” said Chandra Bhansali, co-founder and CEO of AccountantsWorld. “Whether it’s obtaining timesheets with hours 26 I F A L L 2 016

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from employees, locating the correct unemployment rate for each new year from employers, or getting information about third-party payments, these are all significant challenges. Chandra Bhansali CPAs need software that provides visibility into the information they need – for example, enabling them to easily review payroll information for a client’s look-back period to determine whether to change the client’s federal tax deposit frequency – and that helps them to collect information on a timely basis with automatic reminders, and easily-generated custom or batch emails.” “Since the CPA’s major concern is often preparing his client’s financial statements, his Payroll software must also include write-up integration and/or provide Ken Garen built-in General Ledger summation reports for quick export to the write-up system according to client’s specific chart of accounts,” said Ken Garen, president and co-founder of UBCC. “One of the most common problems CPAs have with payroll processing software is the seamless integration of their payroll solutions into accounting softRalph Matlack ware,” said Ralph Matlack, director of product management, small business payroll at Intuit. “Not all payroll solutions can perform data sync with accounting software, which can cause manual data entry errors or require more client action.” “Using inadequate payroll software can now become a problem where it wasn’t before,” said Ray Fazel, president

of Paymate Software. “The businesses that do need this kind of detail (and not all do) require a robust system that is flexible and easily capable of integration with Ray Fazel accounting, time & attendance, scheduling and other software. The solution to the problem is seemingly simple, but often harder to execute: switch payroll software, or upgrade to the next level of the same software that can handle the required payroll/accounting complexities. Making the switch can be hard, but definitely worth it.” A CPA must keep the IRS in mind with every step taken. This means knowing tax law and ACA compliance to ensure complete compliance for all clients. “Learning the compliance rules of a particular industry may be so difficult that the CPA may decide to turn away payroll work rather than invest in learning Tom Douglass those rules for only one client,” said Tom Douglass, president of Advanced Micro Solutions. “For this reason, many CPAs decline to perform payroll services for restaurants while other CPAs specialize in that service.

This article is continued on www.CPAmagazine.com.

PAYROLL PROCESSING COMPANIES AccountantsWorld ADP Advanced Micro Solutions CheckMark Cougar Mountain Software General Ledger Intuit myPay Solutions Paymate Software Red Wing Software UBCC

CPA Business Directory Call 888-610-1144 today to add company listings EMAIL ENCRYPTION

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AppRiver CipherPost Pro™ appriver.com sales@appriver.com 866-223-4645 CipherPost Pro™ makes it simple to encrypt your confidential emails from sender to recipient, and know when they’re opened and read. Office 365 compatible!

CheckMark, Inc. CheckMark Payroll Service checkmark.com/ payroll.php salesinfo@checkmark.com 800-444-9922 We take pride in bringing world class Payroll and Accounting solutions at a fraction of what other popular manufacturers cost. Take a Free Trial.

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PRACTICE MANAGEMENT CPA Site Solutions Website Design and Internet Marketing cpasitesolutions.com service@cpasitesolutions.com 800-896-4500 CPA Site Solutions is the largest provider of website design and online marketing solutions for accounting professionals and is renowned for delivering measurable growth. TPS Software, Inc. TPS Time & Billing tpssoftware.com sales@tpssoftware.com 888-877-2231 TPS- trusted by more than 16,000 accountants in small and mid-sized firms to look after time tracking, billing and provide management tools.

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TAX PREPARATION Intuit ProSeries, ProConnect Tax Online, Lacerte proconnect.intuit.com 877-682-4254 Intuit Inc. creates business solutions that simplify the business of life for accounting professionals with tax preparation offerings like ProConnect Tax Online, ProSeries and Lacerte. Drake Software Drake Software drakesoftware.com becky.reed@drakesoftware.com 800-890-9500 Drake Software offers value and incredible support in a complete tax preparation software for professionals.

TIME AND BILLING

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FALL 2016 | Volume 16, No. 3

Focus on what you do best and let CPA Site Solutions remove the hassle of marketing your firm.

Editor | T. Steel Rose, CPA, ACG, cpa@cpamagazine.com Managing Editor | Joshua Fluegel, josh@cpamagazine.com

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If you need CPE, study this issue, answer the questions and fax your answers to 817-756-7252 today. Instructional Method: Field of Study: Program Prerequisites: Recommended CPE Credit: CPE Quiz Expiration: Quiz Title:

Self-study Taxes (3 hours) A basic understanding of tax preparation 3 hours October 2017 Windfalls, IRS Tax Planning and S Corps

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

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

Fall 2016: Answer the following 15 questions and complete the answer sheet on page 31. 1.

For which of the following are awards for damages not taxable? A. Discrimination B. Interest paid on a judgment C. Defamation D. Personal physical sickness

2. Damages received to compensate for property losses may be tax free if the recovery _______________. A. does not exceed the individual’s basis in the property. B. has interest paid on it. C. goes to a person who is not claimed as a dependent. D. exceeds the individual’s basis in the property. 3. How might a windfall be taxed? A. A wrongful death claim made under a state statute that treats all of the recovery as punitive damages. B. When a donation is made to a disreputable charity.

C. If a business owner’s company goes public. D. When distributions are taken from an inherited IRA.

4. What must be provided to legally split lottery winnings among family members to minimize the tax burden? A. A receipt for the purchased lottery ticket/drawing receipt. B. Proof that there was an agreement to share the prize before the money was won. C. Proof of ownership of the lottery ticket/drawing receipt. D. Proof that the family has been declared as kin before the purchase of the lottery ticket/drawing receipt. 5. How could a recipient of a windfall receive an upfront deduction and still distribute the award years later? A. Support a business through channels established by the JOBS Act. B. Establish a charitable foundation to make donations. C. Set up a trust for a dependent. D. None of the above. Continued on page 30 Manage, Enhance and Expand Your Practice F A L L 2 016 I 29

for 3 $25 CPE Hours

If you need CPE, study this issue, mark the answers on page 31 and fax to 817-756-7252 today.

Continued from page 29

6. If an S Corporation shareholder is personally liable for the repayment of a debt, the amount at risk is increased by the full amount of the property’s adjusted basis. However, if a shareholder is not personally liable: A. the amount at risk is increased by the adjusted basis of the property contributed and multiplied by the nonrecourse debt. B. the amount at risk is decreased by the adjusted basis of the property contributed and further decreased by the nonrecourse debt. C. the amount at risk is decreased by the adjusted basis of the property contributed and increased by the nonrecourse debt. D. None of the above. 7. Section 465(b)(2) states that an S corporation shareholder is atrisk only with respect to amounts borrowed for use in the corporation to the extent that the shareholder: A. is liable proportionate to the amount that the corporation pays the shareholder back. B. is personally liable for the repayment of such amounts. C. has pledged property, other than property used in such activity, as security for such borrowed amount. D. Both B and C 8. A shareholder is not at risk with regard to qualified nonrecourse financing that is: A. Convertible debt. B. Borrowed with respect to the activity of holding real property. C. Financing for which no person is personally liable for repayment. D. Borrowed from a qualified person. 9. According to the Consumer Financial Protection Bureau the following are the most common factors used to determine a credit score except: A. The number of lines of credit a consumer has. B. A consumer’s most recent credit activity. C. How long a consumer has had their accounts open. D. Whether a consumer had any debts referred for collection, foreclosure or bankruptcy. 10. Which of the following is not one of the items prohibited by the Equal Credit Opportunity Act for calculating a credit score. A. Race or color B. The number of a consumer’s dependents. C. Marital Status D. Whether a consumer has formally disputed information contained on your credit report. 11. Which of the following is used to calculate a consumer’s credit score? A. How many old accounts have you recently closed? B. The superlative marks on a consumer’s account.

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C. How long it has been since a consumer used certain accounts? D. All of the above

12. An IRA can be bequeathed to a multi-life charitable remainder unitrust that initially benefits the surviving spouse and mandates a _____ payout. A. 2% B. 5% C. 10% D. 18% 13. Which of the following regarding the IRS’ taking power is true? A. If a taxpayer refuses to pay taxes then there will be a lien in favor of the U.S. upon all property and rights to property, whether real or personal, belonging to such person. B. The IRS may file a lien against a negligent taxpayer the delinquent amount (including interest and assemble penalty only). C. A federal tax lien may only attach to property in which a delinquent taxpayer has interest accrued. D. All of the above is true. 14. In determining a taxpayer’s rights to property, the “nominee” theory states the nominee must hold legal title to property for the benefit of someone else. The facts and circumstances of each case are carefully reviewed to determine if a nominee situation exists, including any but the following: A. A close personal relationship between the nominee and the transferor. B. The nominee paid little or no consideration for the property. C. The parties placed the property in the name of a dependent in anticipation of collection activity. D. The parties did not record the conveyance. 15. The IRS may deem a taxpayer’s bank account activity suspicious and freeze the account, assert all deposits are income to a taxpayer, assess tax, and levy the account immediately if it meets a very low standard of “reasonableness.” The code provision that allows this action focuses on the reasonableness of the IRS assessment. The standards to be employed by the reviewing court in determining whether the government has met its burden of proof to perform this action are all but the following: A. Whether taxpayer is or appears to be planning to quickly depart from United States to conceal himself. B. Whether taxpayer’s financial solvency appears to be secure. C. Whether taxpayer is or appears to be designing to place his property beyond the reach of the government either by removing it from the United States or by concealing it, or by transferring it to another person, or by dissipating it. D. None of the above.

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