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Vol. 17, No. 1

Steven Vertucci, CPA


CPA Magazine P.O. Box 92342 Southlake, TX 76092


3 Hours o



You Read It... Now Get Credit


for 3 CPE Hours

Relevant Current Client Tax Tips Tax Strategies IRS Representation Advice Tax Law Updates Technology Updates






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

10 Robert E. McKenzie J.D.


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


T. Steel Rose CPA, Editor


Adam Fayne

NEXT ISSUE: Product Reviews 1120 & 1065 Cloud Accounting Website Builders Manage and Expand Your Practice IRAs Collection Technology Business Tax 101 ObamaCare Consulting IRS Penalties Audit Insurance Social Security Consulting

e m o c l e W J

ust breathe…and take this tax season one 1040 at a time. Not only will you make it through, it could possibly be your most successful yet. You will find victory so long as you remain attentive to your clients and continue to grow. The goal of CPA Magazine is to help with the latter by bringing you valuable information from the profession’s leading minds. This year we introduce a weekly news broadcast, The Bottom Line, bringing you the top stories in one minute to keep you up to date on the latest tips and strategies from the editors of CPA Magazine. In this issue Sidney Kess discusses disasters and how to assess presents the damages for tax purposes. Jerry Love follows up on a previous article about the Fair Labor Standards Act from the Department of Labor. Love continues by explaining in detail what options employers have when compensating salary and hourly employees. Martin M. Shenkman reviews the proper way to transfer closely held LLC interests by gift or sale and the documentation required. I disclose information about estimated number of tax dodgers and how the IRS is tracking them down to “insist” they pay their patriotic dues. Adam Fayne describes the difficult path a taxpayer must walk when being audited and how to keep the endeavor civil, not criminal. I sat down with Steven Vertucci to talk about the work he does with MaloneBailey, an auditor of small SEC companies. This issue also takes a closer look at sales tax software and the Obamacare aspects of payroll processing software while talking to vendors of the software itself. More CPAs are obtaining CPE credit by 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.

T. Steel Rose CPA, ACS Editor

Manage, Enhance and Expand Your Practice  TA X S E A S O N 2 017   I  3


2017 Buyers Guide

3 Hours of CPE


Tax Season 2017


Firm Spotlight



Understanding Pay Options with the New DOL Regulations Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA


Tax Aspects of Disasters Sidney Kess, CPA, J.D., LL.M




Volume 17, No. 1



5 Ways to Serve the New Sharing Economy Entrepreneurs


Maximize Your Loyalty by Minimizing Your Clients’ Tax Bill


CPAs’ Role Grows After Estate Tax Repeal



IRS DEFENSE ADVISOR Dramatic Drop In IRS Enforcement Actions Robert E. McKenzie, J.D.

Tax Consideration of Identity Theft



Documentation to Transfer Closely Held LLC Interests by Gift or Sale



Role Grows # CPAs’ 18 After Estate Tax Repeal

R&D Tax Credit Program for Eligible Small Businesses and Eligible Start-Ups





Firm Spotlight Courageous Firm Audits NYSE Companies Steven Vertucci, managing partner of MaloneBailey T. STEEL ROSE, CPA

Software Helps with ACA Uncertainty



Tax Consideration of Identity Theft

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


Prove Your Worth Through Sales Tax Recommendations

CPE Quiz: D isasters, DOL Regulations and IRS Audits


IRS Mining Data for Tax Dodgers T. Steel Rose, CPA


25 29





Keeping It Civil, Not Criminal During IRS Audits Adam Fayne 4  I  TA X S E A S O N 2 017


1 9


CPA Profession Top Product Nominees

R&D Tax Credit Program for Eligible Small Businesses and Eligible Start-Ups



he Federal-Level Research and Development Tax Credit Program (RTCP or RTC) was originally enacted into the Internal Revenue Code through Peter J. Scalise the Economic Recovery Tax Act of 1981 as a temporary provision of the Code at a time when research and development jobs were significantly declining throughout the United States. Notably, the RTCP was introduced into the Code to encourage businesses to invest in significant research and development efforts with the high expectations that such an advantageous tax incentive program would facilitate in stimulating economic growth and investment throughout the United States and prevent further jobs from being outsourced to other countries. Most recently, on December 18, 2015 the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) significantly enhanced the RTCP on a myriad of levels by making the RTCP a permanent tax incentive within the Code and considerably restructured the program to: •  Allow eligible “Small Businesses” (i.e., $50 million or less in gross receipts) to claim the RTC against the Alternative Minimum Tax (AMT) for tax years beginning on January 1, 2016; and •  Allow eligible “Start-Up Companies” (i.e., those with less than $5 million in gross receipts and earning revenue for less than 5 years) to claim up to $250,000 of the RTC against the company’s Federal Payroll Tax for tax years beginning on January 1, 2016.

Eligible Small Businesses Can Now Claim the RTC Against AMT

Businesses with average annual gross

receipts of less than $50 million are now eligible to offset both their regular income tax and their AMT with RTCs. Before the enactment of the PATH Act, businesses in AMT positions were unable to utilize their RTCs to offset their tax liability. Regardless, it is important to point out that RTCs can generally be either carried back two years or carried forward up to 20 years before the RTCs could expire unutilized.

Eligible Small Business Best Practice Guidelines • Pursuant to I.R.C. § 38(c)(5)(C), an eligible “Small Business” is defined as a corporation that is not publicly traded; a partnership; or a sole proprietorship with average annual gross receipts for the three taxable year period preceding the current taxable year not exceeding $50 million; and • Pursuant to I.R.C. § 448(c)(3), if the business (i.e., including a predecessor entity) was not in existence for an entire three-year period, then the gross receipts test applies to the period it was in existence, and gross receipts for short taxable years shall be annualized.

Eligible Start-Up Companies Can Now Offset Payroll Taxes with RTCs

Businesses with less than $5 million in gross receipts in the current taxable year (and that have no gross receipts for any taxable year prior to the five taxable year period ending with the current taxable year) can offset the employer portion of Old-Age, Survivors, and Disability Insurance (hereinafter “OASDI”) by up to $250,000 for each year.

Eligible Start-Up Company Best Practice Guidelines • If gross receipts are less than $5 million in 2016, then the business

must have no gross receipts before 2012; •  Taxpayers must make an annual election specifying the amount of its RTC (i.e., not to exceed $250,000) used as a payroll tax credit, on or before the due date of its originally filed tax return, including extensions. After making the election, businesses may begin to offset the employer portion of OASDI in the following calendar quarter. As a caveat, it should be duly noted that revoking the election requires permission from the Secretary of the Treasury; and • Social Security tax amounts up to 6.2% of an employee’s social security taxable wages for the calendar year (e.g., the 2016 social security taxable wage limit is $118,500).

3 Step Tax Compliance Reporting Requirements to Offset Payroll Tax with the RTC 1.  File Form 6765 entitled “Credit for Increasing Research Activities” which is currently being revised and finalized so companies can make an annual election to specify the amount of RTCs that will be applied to the employer-portion of Social Security tax.

This article is continued on


Related CPE Quiz on Page 29

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

Manage, Enhance and Expand Your Practice  TA X S E A S O N 2 017   I  5

Understanding Pay Options with the New DOL Regulations FSLA do not allow “DOLanandemployer to use


This article is a follow up to the prior article which highlights the new regulations for the Fair Labor Standards Act (FLSA) from Department of Labor (DOL) raising the standard for which an employee will qualify to be exempt from overtime. On May 18, 2016, President Obama announced the DOL’s final rule updating these regulations effective December 1, 2016 which sets the salary level at $47,476 annually for a full-year worker to be considered exempt from overtime. As covered in more depth in the prior article, there are more requirements for an employee to be exempt from overtime. It is important for employers to understand the basic classifications start with the determination of their employees falling within two categories: exempt or non-exempt as it relates to whether an employee will be entitled to payment for overtime. See the prior article for a discussion of definition of how to classify employee as exempt or non-exempt. In this context, many employers have long believed that exempting an employee from the overtime regulations is as simple as classifying the employee as a “salaried employee” or reaching a mutual agreement with the employee that they will be paid with a flat salary. Many employers have developed a concept they are allowed to classify employees as “salaried” or “hourly” and that as long as the employee is classified and paid on a salary basis, then the employer will not have any obligation to pay overtime if the employee works more than 40 hours in a workweek. This is not consistent with the DOL regulations. It is important for employers to have a fundamental understanding of the options concerning how they are able to compensate employees. If an employee meets the basic criteria to be exempt from overtime, it is acceptable to pay them on a salary basis and the employer is not obligated to pay those employees overtime if they work more than 40 hours in a workweek. Compliance with the DOL regulations must be based on proper classification of the employees and to utilize proper methods to calculate their compensation. Misclassification of employees not only may expose the employer to violation of the FSLA but may also contribute to employee dissatisfaction and turnover. When the employees are not exempt from overtime, the simple and straight-forward method of compensation would be to pay these employees on an hourly basis which would include straight time compensation for the first 40 hours worked in a workweek and paid overtime at a rate of time and half the straight 6  I  TA X S E A S O N 2 017

comp-time off in lieu of paying for overtime in the private sector.

Financial Advisor

Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA time rate for the hours over 40 hours. There are other options this article will discuss. In fact, this topic can be extremely complicated if the employer is using multiple methods to pay the non-exempt employees such as paying them a year-end bonus. The foundation of the compensation for the non-exempt employees is for the employer to establish a workweek. The workweek can begin on any day of the week and should be seven consecutive days (seven consecutive 24-hour periods). Once the workweek is established it should not be changed unless for a business reason and not changed frequently. Regardless of the method of compensating the non-exempt employees, the system should determine if the employee has worked more than 40 hours during this seven-day workweek and compensate the employee at a premium for those hours. Additionally, the compensation of the non-exempt employee must be paid at least the minimum wage based on either FLSA or the state regulations applicable to the employer’s work force.

Comp-Time for Non-Exempt Employees

DOL and FSLA do not allow an employer to use comp-time off in lieu of paying for overtime in the private sector. Some employers (including some CPA firms) have a system whereby they track the hours worked in excess of 40 hours by the employees during busy season and allow (sometimes require) the employees to take time off in the slower months. Even though this approach may be mutually agreeable with the employer and employees, the regulations do not allow this use of comptime for non-exempt employee (whether they are paid hourly or a variation of the salary models). Essentially the regulations would require the employee have a maximum of 40 hours in the workweek and then take that “comp time” off within the same seven-day workweek. This is because DOL and the courts have essentially interpreted FLSA as requiring overtime to be figured on the basis of a single workweek.

“The Act...does not permit averaging of hours over 2 or more weeks. “

One reason the concept of comp-time gets to be confusing to employers is DOL/FSLA allow the use of comp-time for certain public sector employees such as police officers and firefighters in lieu of overtime pay for irregular or occasional overtime work. As I have researched the material for this and the prior article, it has become increasingly clear to me that payroll and the methods an employer is allowed to use to pay their employees is a very complicated topic. This article is due in part to some of the phone calls and emails I received after the first article was published. I will not proclaim to be an expert, but if you have questions, you are welcome to email me or call me. Other resources to review for this topic are: • FLSA-Fair-Labor-Standards-Act/Overtime-EverythingYou-Need-to-Know/# | Published by Compensation.BLR. com April 7, 2003 Overtime – Everything You Need to Know” • | Published by October 17, 2011 Giving Employees Compensatory Time Off in Lieu of Overtime? Read this First! Written by N Nayab and edited by Jean Scheid • Regulations Part 778: Overtime Compensation US Wage and Hour Division, Title 29, Part 778, WH Publication 1262 reprinted May 2011 The relevant sections of the Fair Labor Standards Act are as follows:

§ 778.100 The Maximum-Hours Provisions Section 7(a) of the Act deals with maximum hours and overtime compensation for employees who are within the general coverage of the Act and are not specifically exempt from its overtime pay requirements. It prescribes the maximum weekly hours of work permitted for the employment of such employees in any workweek without extra compensation for overtime, and a general overtime rate of pay not less than one and onehalf times the employee’s regular rate which the employee must receive for all hours worked in any workweek in excess of the applicable maximum hours. The employer is prohibited from employing the employee in excess of the prescribed maximum hours in such workweek without paying him the required extra compensation for the overtime hours worked at a rate meeting the statutory requirement.

§ 778.101 Maximum Non-Overtime Hours As a general standard, section 7(a) of the Act provides 40 hours

as the maximum number that an employee subject to its provisions may work for an employer in any workweek without receiving additional compensation at not less than the statutory rate for overtime. Hours worked in excess of the statutory maximum in any workweek are overtime hours under the statute. [46 FR 7309, Jan. 23, 1981] § 778.102 Application of Overtime Provisions Generally Since there is no absolute limitation in the Act (apart from child labor provisions) on the number of hours an employee may work in any workweek, he/she may work as many hours a week as he/she and his employer see fit, so long as the required overtime compensation is paid him/her for hours worked in excess of the maximum workweek prescribed by section 7(a). The Act does not generally require, however, that an employee be paid overtime compensation for hours in excess of eight per day, or for work on Saturdays, Sundays, holidays or regular days of rest. If no more than the maximum number of hours prescribed in the Act are actually worked in the workweek, overtime compensation pursuant to section 7(a) need not be paid. Nothing in the Act, however, will relieve an employer of any obligation he may have assumed by contract or of any obligation imposed by other Federal or State law to limit overtime hours of work or to pay premium rates for work in excess of a daily standard or for work on Saturdays, Sundays, holidays, or other periods outside of or in excess of the normal or regular workweek or workday. (The effect of making such payments is discussed in §§778.201 through 778.207 and 778.219.) [46 FR 7309, Jan. 23, 1981]

§ 778.104 Each Workweek Stands Alone The Act takes a single workweek as its standard and does not permit averaging of hours over 2 or more weeks. Thus, if an employee works 30 hours one week and 50 hours the next, he must receive overtime compensation for the overtime hours worked beyond the applicable maximum in the second week, even though the average number of hours worked in the 2 weeks is 40. This is true regardless of whether the employee works on a standard or swing-shift schedule and regardless of whether he is paid on a daily, weekly, biweekly, monthly or other basis. This article is continued on


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  TA X S E A S O N 2 017   I  7

Tax Aspects of Disasters


The flooding in parts of Louisiana on August 11, 2016, and in Florida on September 2, 2016, was devastating; both lives and property were lost. Property losses from this and other casualty events may be covered by insurance. However, insurance may not adequately compensate individuals and businesses for property damage and destruction. Tax breaks may provide some economic help.

Determining a Casualty Event

A nonbusiness casualty event for individuals seeking to deduct uninsured losses arises from a fire, storm, shipwreck or other casualty. Case law has helped define “other casualty”: as a sudden, unexpected, or unusual event. Examples of casualties include: • Earthquakes • Fires • Floods • Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster • Mine cave-ins • Shipwrecks • Sonic booms • Storms, including hurricanes and tornadoes • Terrorist attacks • Vandalism • Volcanic eruptions However, progressive deterioration is not a casualty event for tax purposes. For example, the collapse of a retaining wall that had been deteriorating for an estimated 25 years was not a casualty; an individual could not deduct her loss (Alphonso, TC Memo 2016-130). The wall at issue was the retaining wall that ran along the Henry Hudson Parkway north of the George Washington Bridge and collapsed onto Riverside Drive on May 12, 2005. Examples of other occurrences that do not qualify as a casualty event: • Damage to an antique rug by a puppy that is not housetrained. • Termite or moth damage. • Destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests.

Determining the Amount of the Loss

For nonbusiness (personal) property, the loss is lesser of the adjusted basis of the property (typically cost) or the difference between the property’s value before and after the disaster. Fair market value usually is ascertained by an appraisal made by a “competent” appraiser (Reg. §1.165-7(a)(2)(i)). The appraisal must take into account the effects of any general market decline affecting undamaged as well as damaged property, which may 8  I  TA X S E A S O N 2 017

FEMA payments under the “Individual and Households

Program (IHP) to individuals are also tax free.

Tax Advisor

Sidney Kess, CPA, J.D., LL.M occur simultaneously with the casualty event. Sentimental value is not taken into account. Instead of obtaining an appraisal, the cost of repairs to the damaged property is acceptable evidence of the loss in value if (Reg. §1.165-7(a)(2)(ii)): 1. The repairs are necessary to restore the property to its precasualty condition, 2. The amount spent for repairs is not excessive, 3. The repairs relate only to the damage suffered in the casualty, and 4. The value of the property after the repairs does not exceed its value immediately before the casualty. The loss is reduced by any insurance and other reimbursements and by $100 (Code Sec. 165(h)(1)). If a taxpayer has insurance a claim must be made, even if it may cause premiums to increase or the insurance company drops coverage. If a taxpayer has some coverage but no claim is made, no deduction can be taken. The amount of the loss is not reduced by food, medical supplies, and other forms of assistance received from government or private sources, unless they are replacements for lost or destroyed property (IRS Publication 547). After determining the amount of the loss from a casualty, then total losses for the year are deductible as an itemized deduction to the extent they exceed 10% of adjusted gross income (AGI) (Code Sec. 165(h)(2)). The casualty loss is an itemized deduction claimed on Schedule A of Form 1040 (i.e., itemizing is required to take a casualty loss deduction). However, the loss is not subject to the phase-out of itemized deductions for highincome taxpayers (Code Sec. 68(c)(3)).

Business or Investment Losses

Losses to business or investment property are fully deductible; they are not reduced by $100 and are not subject to the 10%-ofAGI limit. For property that is totally destroyed and not covered by insurance, the loss is the property’s adjusted basis. Where property has been expensed or fully depreciated, this means a zero basis so no casualty loss deduction can be claimed.


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Disaster Losses

If the loss occurs within an area declared eligible for federal disaster relief from the Federal Emergency Management Agency (FEMA), then there is a helpful tax option to consider. The loss can be claimed on a tax return for the year of the casualty event or for the prior year (Code Sec. 165(i)). Claiming the loss for the prior year entitles a taxpayer to receive a tax refund, which can be used to help rebuild after the disaster. The IRS lists areas qualifying for this disaster relief at To claim the loss on a prior year return, take the loss into account if the return has not yet been filed. If the return for the prior year has already been filed, then an amended return is necessary. In deciding whether to take the loss on the current or prior year return, it usually makes sense to claim it in the year in which adjusted gross income is lower so that a greater portion of the loss is deductible (i.e., more of it exceeds 10% of AGI). When there is a federal disaster, the IRS may provide some tax relief, such as extending the time for filing returns. For example, the IRS extended the deadlines falling between August 11, 2016 (the date of the storm causing severe flooding in parts of Louisiana) and January 17, 2017, to January 17, 2017 (LA2016-20, August 15, 2016). Similarly, victims of flooding parts of Texas with filing deadlines between May 26, 2016 (the date

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of the storm) and October 17, 2016, have an extended due date until October 17, 2016 (HOU-2016-08, June 13, 2016). However, the IRS cannot extend the time for depositing taxes or filing employment and excise tax returns.

Mitigation Payments and Reimbursements

Mitigation payments. Qualified disaster relief payments, such as amounts paid under the Robert T. Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act to or for the benefit of the owner of any property for hazard mitigation are excludable from gross income. The basis of property is not adjusted for the payments. FEMA payments under the Individual and Households Program (IHP) to individuals are also tax free.

This article is continued on


Related CPE Quiz on Page 29

Executive Editor Sidney Kess is CPA-attorney, speaker and author of hundreds of tax books. The AICPA established the Sidney Kess Award for Excellence in Continuing Education in his honor, best-known for lecturing to over 700,000 practitioners on tax. Kess is senior consultant for Citrin Cooperman and is consulting editor to CCH. Manage, Enhance and Expand Your Practice  TA X S E A S O N 2 017   I  9

Dramatic Drop In IRS Enforcement Actions


With the filing season rapidly approaching it is worth reviewing the impact of the six year sustained attack on the IRS budget by Congress. Over the past six years Congress has dramatically reduced the IRS budget. The IRS budget has been reduced by about $12 billion to about $10 billion dollars per year. In 2011 the IRS budget was frozen and its workforce shrank. In 2012, 2013, 2014 2015 and 2016 Congress shortsightedly cut the IRS budget and its workforce has shrunk dramatically. Because of Congressional cuts in IRS budgets its workforce continues to shrink. From a high of about 92,000 employees in 2010, the IRS now has fewer than 74,000 employees. The cuts have resulted in reduced service to compliant taxpayers and their representatives. The cuts have also encouraged and empowered non-compliant taxpayers. There have been dramatic drops in enforcement activity by the IRS. Examinations are down over 25%. Levies against delinquent taxpayers are down over 50% and there are 40% fewer criminal investigations. See Charts A and B.

Reduced Service

Without adequate staffing many services once available to taxpayers and their representatives have been reduced or eliminated. In 2015 only 37.3% of calls to the IRS help line were answered. That number jumped to 72.6%in 2016 because of a special allocation by Congress in the 2016 budget.1 Even with increased response in

a result of budget "Asconstraints IRS no longer provides advice to walk-ins.


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

the filing season, IRS ceased answering tax questions after April 17 on its help line. As a result of budget constraints IRS no longer provides advice to walk-ins. Taxpayers must schedule an appointment in advance to speak personally with an IRS representative. The IRS has also eliminated assisting taxpayers in the preparation of their returns. In an effort to meet budget constraints the IRS has also closed many of its walk-in sites forcing taxpayers to travel long distances to receive face-to-face advice. The taxpayer Advocate has noted that these service cuts disproportionately harm the poor and seniors.2 Practitioners calling the Practitioner Priority Case 800 number face extended wait times and on many









Revenue Officers







Revenue Agents



















Special Agents Total 10  I  TA X S E A S O N 2 017

























FY 2016

FY 2015

FY 2014

 Investigations Initiated




 Prosecution Recommendations
















 Percent to Prison




occasions are disconnected automatically by the system as a result of an IRS policy known as “courtesy disconnects”. Taxpayers and their representatives corresponding with the IRS also have found the Service to be unresponsive. Many times they receive form letters stating the IRS has not had time to review the response and that response will be delayed 60 days. That response is followed by another letter stating that the Service needs another 60 days. Those trying to be responsive to the IRS and resolve problems find that it is almost impossible to effectively reach a satisfactory result. Another problem harming compliant Americans is the IRS Revenue Protection System. In an effort to prevent identity theft additional computer screens have been placed in the systems. That system erroneously flagged over 700,000 refunds during the 2016 filing season. Those whose refunds are frozen may not even receive a notice from the IRS. When one finally calls to inquire about the frozen refund she is referred to another 800 number, 800-830-5084. The victim who calls the hotline will be subjected to interminable wait times only to be followed by extensive demands for information from her 2014 and 2015 tax returns. Clients have related that they were treated like a criminal simply because they merely sought to receive their refund. The Taxpayer Advocate listed the Revenue Protection system #4 on her list of problems at the IRS in her 2015 report to Congress.


Non-compliant taxpayers have reasons to rejoice as the IRS now lacks the resources to pursue them. About 82% of Americans are fully compliant3 yet the IRS only has resources to pursue a diminishing part of that group. The IRS only managed to audit .8% of individual returns in 2015 and that number is down from 1.10% in 2010. In 2010 the Service collected $16.9 billion from audits.4 In 2015 that number had dropped to $7.32 billion. The six years of budget cuts have taken about $1 billion dollars from the total IRS enforcement budget and as direct result the American taxpayers have suffered an over $9 billion loss

in additional revenue from those filing inaccurate returns. The reduction in enforcement is also dramatic for those who owe taxes. Fewer and fewer delinquent taxpayers have levies issued against their assets and liens filed against them. See Chart C. A 2015 Government Accountability Office report found that the IRS’ uncollected tax debts rose 23% since 2009 to $380 billion while the agency’s collection staff fell 23% during the same period after years of budget cuts. Therefore the budget cuts have also reduced revenue from taxpayers who choose not to pay their taxes by billions. The sad state of the IRS’ ability to pursue enforcement is also illustrated by statistics of criminal investigations. Each year the IRS is pursuing fewer criminal investigations. That effect of criminal enforcement on compliance cannot be quantified but it is undeniable that one reason Americans are compliant taxpayers is because they fear discovery of their bad tax conduct. See Chart D.


American taxpayers have historically been among the most compliant taxpayers in the world but our Congress has chosen to empowered tax dodgers and unduly burden compliant taxpayers and their tax advisors though a series of ill-advised budget cuts. Each of those cuts created false economies because of the proven ability of the IRS to efficiently generate revenue from noncompliant taxpayers when it is properly funded. This article is continued on


Related CPE Quiz on Page 29

Robert E. McKenzie of the law firm of Arnstein & Lehr LLP of Chicago, Illinois, concentrates his practice in representation before the Internal Revenue Service and state tax agencies. He previously served as a member of the IRS Advisory Council (IRSAC) which is a group appointed by the IRS Commissioner from 2009 to 2011. Manage, Enhance and Expand Your Practice  TA X S E A S O N 2 017   I  11

Documentation to Transfer Closely Held LLC Interests by Gift or Sale “

Appraisals must be completed by ‘qualified appraisers’ as defined in applicable Regulations.

Funding Irrevocable Trust with Family or Closely Held LLC Interests

LLCs are the default entity for most family or closely held business and real estate ventures. Practitioners are therefore commonly involved in assisting clients with these transfers. The role of the CPA will vary depending on the involvement of the client’s lawyer, an outside appraiser and others. The following is a broad checklist listing much of the information that should be organized for each family or closely held LLCs interest and suggested steps to be taken with respect to the transfer of your interests to an irrevocable trust. Many of the examples use real estate as an example, but if the LLC owned different assets or business interests these would simply have to be changed to be relevant to the particular circumstances. Even though a number of the documents should be prepared by others, e.g., a real estate appraiser (assuming the practitioner does not perform real estate appraisals) or legal documents, the practitioner still needs these steps on his or her radar screen. 1. Coordination of Legal, Appraisal and other Work The more of these steps that can be handled internally by legal counsel for the real estate business/entities, the more efficient and cost effective. This will especially be true if other family members are undertaking similar planning. 2. 2704 Regulations May Eliminate Valuation Discounts a.  The Treasury (IRS) recently issued Proposed Regulations that may eliminate valuation discounts. These Regulations could be effective as early as December 31, 2016. The loss of discounts could have a substantial adverse impact on leveraging these real estate LLC interests out of your clients’ estates. This might result in a flurry of gift and sale transactions before these Regulations become effective. b. This same issue should affect all other owners and thus many if not all owners should be undertaking similar planning by year-end. If this is the case then all owners can share the costs of the appraisals, preparation of transfer documents and other steps. This will greatly simplify the process and lower the cost of all the transfers involved for any particular owner (e.g., your client). c. This checklist might prove useful to coordinate that effort. If other owners will not become involved or will not proceed in this matter it is important that you guide your client to the appropriate steps and realistic cost estimates. 12  I  TA X S E A S O N 2 017

Tax Planning Advisor Martin M. Shenkman CPA, MBA, PFS, J.D. 3.

LLC Owner Details a. Information as to the owners and their relationships for each entity should be obtained. b. This may be essential to the interpretation of the operating agreement and what must be done to approve the particular transfers your client wishes to make. c. In the future this may be essential to determine the applicability of the 2704 valuation discount restriction rules (i.e., is it a family controlled entity in technical not common usage terms). 4. Appraisal a. Appraisals must be completed by “qualified appraisers” as defined in applicable Regulations. The qualified appraiser must complete a “qualified appraisal” which also must comply with a checklist of requirements contained in applicable tax laws. b. The appraisal must be a two-tiered process. i. First the fair market value of underlying real estate must be determined. An MAI appraisal of the fair market value of each real estate property owned by each LLC is necessary. The appraiser will require all the applicable information to complete this type of appraisal: rent rolls, historical operating expenses and rents, survey, leases, and so forth. Whatever data you have used to make these estimates might be useful for an appraiser and might defray appraisal costs but formal appraisals should be collected (e.g. prior appraisals for estate planning purposes, bank appraisals, etc.). ii.  An appraisal of the ownership entity and, in particular, the LLC membership interests of the member which will be transferred as part of the estate planning. This will require that the

appraiser be provided with the governing legal documents for the entity, several years of tax returns, and other data. Some of this is discussed elsewhere in this checklist. 5. Real Estate Documents to Collect a. Narrative i. A narrative for each property/entity that describes the relationship of the owners, who manages the property/entity, the type of property, any plans or anticipated future for the property (e.g., hold for long term, potential sale in a specified time frame, planned rehab, etc.). b. Accounting Data i. Rent roll. ii. Financial statements for a number of prior years. iii. Distributions, salaries and other economic benefits the family receives from the property, and any other important facts. c. Deed i. For any entities that are closely held it is recommended that the deeds to the underling properties also be part of the documentation organized to be certain that they are held in the correct entity name. ii. While this might seem unnecessary, I have seen errors in deeds and entities for clients with similarly significant holdings. It is imperative that before any entity interests are transferred it be certain that the properties are properly titled in those entities. If such an error were discovered on an IRS audit following transfers it could be costly and could undermine significant components of a plan. d. Mortgage i. Current balance will be necessary for the appraiser. ii. Mortgage documentation will be necessary for real estate counsel to review to ascertain what prerequisites if any may affect your intended transfers. e. Leases or other contractual agreements. i. These may affect valuations or assist your real estate counsel in identifying restrictions, notice or other requirements for transfer. 6. Entity Documents to Collect a. Formation Certificate. i. Documents filed on the formation of the entity. ii. Any amendments. b. Certificate of Good Standing for the Entity i. This is inexpensive but, surprisingly even for wellorganized clients, some issues are identified. It is preferable that any issues as to the validity of the entity be addressed by the CPA or attorney before estate planning transactions are consummated. c.  Confirmation of the Tax Status of Each Entity i. While most LLCs are taxed as partnerships some elect to be taxed as S or C corporations. Confirmation of the tax status is vital because of the

importance of achieving a basis step up on death. ii. If the ownership entity is a partnership or LLC taxed as a partnership the ability to step up the inside basis of the partnership in the asset, referred to as a IRC Sec. 754 basis adjustment, will be crucial whether this has been addressed for entities involved. This should all be reviewed now and if amendments are advisable, negotiating (if necessary) with other owners, an amendment and restatement of the entity documents to give members/partners the right to demand that the entity make a 754 basis adjustment. d. Operating Agreement i. Copies of the governing documents for each entity. This is generally an “operating agreement” for an LLC but sometimes other records are involved. ii.  Copies of all amendments. The most current agreement should reflect all current owners and their correct owners and should be consistent with applicable income tax returns (e.g., Forms K-1 of Form 1065 if the LLC entity is taxed as a partnership). iii. Please be certain all copies provided are of fully executed documents. If these do not exist, have the client follow up with counsel. iv. This should be reviewed by your corporate/real estate counsel to ascertain whether transfers of your interests as between each of you and then trusts is permitted. v. As noted below an amended and restated operating agreement should be prepared reflecting all transfers. Many lawyers simply prepare an assignment of LLC membership interests. On a tax audit it is preferable to have an operating agreement reflecting ownership interests before the transfer and one reflecting the revised ownership percentages after the transfer. e. Other Key Legal Documents i. This could include minutes or consents or other documents. f. Recent Federal Income Tax Returns for the Entity i. If the LLCs have all chosen to be taxed as partnership for income tax purposes then this would be Form 1065. This article is continued on www.


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. Manage, Enhance and Expand Your Practice  TA X S E A S O N 2 017   I  13

IRS Mining Data for Tax Dodgers


Tax dodgers cost the Department of Treasury an estimated $300 billion a year. According to the IRS, 83% of taxpayers are fully compliant by paying their share of taxes. Of the 17% non-compliant, the most egregious are those who do not report income. “Some people believe you only have to report the credit card receipts and not the cash revenue,” said Dan Henn, CPA, tax resolution specialist. “You must report all that comes in and goes out. Not filing and reporting is fraud and is criminal.” Good and proactive advice from a CPA to his or her clients would be to not fall into temptation of “knock down money.” I am sure it has other names as well. I heard the term knock down money when I owned part of a restaurant. It seems restaurants deal with a lot of cash. Instead of paying sales tax on the revenue and IRS tax on earnings, restaurants are tempted to pocket cash without depositing it into the bank, hiding it from the IRS. The late comedian George Carlin spent the later years of his life paying back the IRS. Carlin had a $3 million IRS tax debt according to a 2001 interview with Esquire magazine. “Because of my abuse of drugs, I neglected my business affairs and had large arrears with the IRS, and that took me 18 to 20 years to dig out of,” Carlin said. “I did it honorably, and I don’t begrudge them. I don’t hate paying taxes, and I’m not angry at anyone, because I was complicit in it.” While Carlin did the right thing, he highlights the problem of penalties and interest in an interview with “Penalties and interest on back taxes make a mountain out of a mole hill,” he said. If George Carlin’s story isn’t enough to persuade clients to not delve into unreported income, consider how sophisticated the IRS has become to find noncompliant taxpayers. While catching tax evasion is impacted by budget cuts, the IRS is using electronic robots to mine the wealth of data it already has about suspicious tax dodgers in combination with what they find on social media. Celebrating extravagant vacations and promoting a successful side business may prove fascinating to the IRS. According to Kristen Mathews, a partner attorney at the law firm Proskauer Rose LLP, the IRS will be checking individual Facebook and Twitter accounts for improprieties. Reportedly social media monitoring is done only if a tax form raises a red flag. While the IRS is secretive about its methods, sources indicate the IRS is gearing up its data mining. Online activity trackers enhance the trove of information the IRS already uses based on your social security number and banking transactions. It seems everyone from Google to Nike is assembling data to create profiles of us. According to UK publication, The Guardian, the IRS has one tool called Riot. Developed by Raytheon, this tool can mine information from social networking websites and predict behavior based on the data. Riot is allegedly able 14  I  TA X S E A S O N 2 017

social media “Reportedly monitoring is done only if a tax form raises a red flag.

Tax Tips Advisor T. Steel Rose, CPA

to extract data embedded in photographs that have been shared on social media to provide geographic information to track an individual’s movements. However, there is no evidence the IRS would resort to this degree of monitoring. It seems they may be using predictive analytics to predict which individuals don’t pay their taxes. If the IRS is acquiring taxpayer information from digital activities such as eBay auctions, credit card and e-payment transactions in search for tax cheats, taxpayers should know that whatever people do and say electronically can be used against them in IRS enforcement. Consumers may be familiar with Internet cookies used to track their movements and send them targeted ads that follow them to different websites. In trade presentations and public documents, Former Commissioner of Internal Revenue Douglas Shulman said IRS technology will employ “billions of pieces of data” to target enforcement and “detect and combat noncompliance.” U.S. Tax Court records reveal information gathered from Facebook and eBay postings have been used by the IRS in defending tax challenges. Under a Freedom of Information Act disclosure obtained by privacy advocates at the Electronic Frontier Foundation, the group published the IRS’ 38-page manual used to train auditors to search Internet addresses, Facebook postings and other social media to back audit enforcements. In 2012 the IRS used a profiling test model to study 1,500 tax preparers with histories of reporting deficiencies and recovered $200 million.

This article is continued on

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.

5 Ways to Serve the New Sharing Economy Entrepreneurs



ccording to the August 2016 data “Self-employment In The United States” published by Bureau of Labor Statistics, nearly 15 million Hitendra R. Patil people were self-employed, or about 10% of all U.S. workers. Self-employed, includes those who had incorporated their businesses and those who had not. A “broader” category of “freelancers” indicates there are 40-42 million such people in US. The IRS’ “2016 Instructions for Form 1099-Misc” lists the criteria for reporting 1099 income. Hidden in those criteria are the new revenue opportunities for accountants! Accountants can connect the dots that cause shifts in the economic environment to grab the resulting opportunities.

1. 1099 Workers and Accountants

Many of these 1099 workers may not even recognize their tax liabilities. It is only when they meet their tax preparer, they will get to know they need to classify their income from 1099 sources. Just like the proverbial “shoe box of receipts and statements” small business owners bring to their accountants right during the busy tax season. Accountants can avoid such lastminute situations with some proactive work. It will be prudent for accountants to ask their existing individual tax clients if they had the types of incomes that could qualify for 1099 Tax reporting.

2. Businesses that Deploy 1099 Workers and Accountants With the

platform-economy (e.g. Uber, Lyft) usage exploding to mammoth proportions, it is not clear if those who earn income from these platforms get any tax guidance. There could be several such smaller platforms people use to find

gigs. The existing business clients of accountants may be using 1099 workers for various tasks. When accountants do the bookkeeping and accounting of their business clients, if they observe such payments that qualify for 1099 tax form, it gives three opportunities to accountants: a. To provide consulting to the business owners on tax implications and compliance needs. b. To reach out to those 1099 workers to explore possibilities for tax preparation services for such workers. A referral from the business owner makes your job easier! c). In most cases, the 1099 worker will also be working with other businesses. Once you reach any 1099 worker with tax compliance service, you can get leads, and referrals to other business owners. And then the cycle can repeat!

3. Look Out for Stealth Touch Points

Did you use an Uber car last month? Did you hire an independent contractor to mow the lawn? Did you get a plumbing job done from an individual service provider? It is likely that some of the routine, repetitive, household or sundry jobs are now done by self employed persons rather than some contractor company employees. What about similar experiences your firm’s staff goes through? Do they use similar services? Do you have a brief, crisp and clear – dos and don’ts – info-brochure to give away to these individuals when you interact with them? There are several stealth touchpoints you and your firm’s staff must be going through every day. Leverage those opportunities to educate such 1099 workers. Tell them about income and expense categorizations, self employment taxes, expenses, deductions, home office deductions, work-use devices deductions,

transportation expenses deductions, health insurance deductions and IRAs.

4. Your Pricing Studies indicate that the shared economy workers are likely to have lower income levels than those in regular jobs. Their spending capacity may therefore be comparatively lower. Do you expect them to pay higher tax consulting fees or even tax prep fees? To optimize your costs, it might be a good idea to standardize your package and process of providing service to these 1099 workers. But treating them as the so called “commodity buyers” can be a mistake. What if they can provide you referrals to five to 10 businesses? What if they can offer you their time and services in barter? What if they can pay you referral fees? Remember, they are entrepreneurs. Their business makes them deal with many people. Their network is perfectly poised to buy accounting and tax services from you. Consider all such factors into your pricing. 5. Market Shift Requires Paradigm Shift

“The entrepreneur always searches for change, responds to it, and exploits it as an opportunity.” – Peter Drucker Whenever there are market shifts – in demographics, in regulatory environment, in generational behavior pattern or technological, they always create new needs and gaps that need to be filled. Market changes can have huge implications.

This article is continued on Hitendra R. Patil, the author of “Accountaneur: The Entrepreneurial Accountant” explores how insights from behavioral economics apply to the tax and accounting profession.

Manage, Enhance and Expand Your Practice  TA X S E A S O N 2 017   I  15

Keeping It Civil, Not Criminal During IRS Audits



In recent years, the IRS has been asserting more civil fraud penalties during the examination phase. While a civil fraud penalty may be expensive, many clients should be relieved that the case was not referred or accepted for criminal investigation. During 2015, the IRS initiated 3,853 criminal investigations, which led to 3,208 indictments. In my practice, we refer to our clients’ audits that have criminal or civil fraud exposure as “eggshell audits.” The reason is simple, we are walking on eggshells to try and keep the audit civil without cracking a shell and the audit changing course – civil fraud or a criminal referral. Tax fraud can be punishable by both civil (i.e. money) and criminal (i.e. jail time and money) penalties, with the civil violations primarily in Title 26 and the criminal violations principally in Title 18, respectively, of the USC. For example, a taxpayer can commit tax fraud and be punished with civil penalties under 26 USC § 6663, without being charged with criminal tax evasion. There is a statute of limitations for tax crimes, which is the amount of time a prosecutor has to file charges. This statute of limitations represents how long your clients should be looking over their shoulder after – willfully or otherwise – lying on their tax return. The general rule of thumb is the IRS has three years to audit tax returns, and six years if over 25% of income has been omitted from the original filed tax return. You may also need to consider when the six-year period starts. The IRS could prosecute a series of fraudulent tax returns as a single charge and only start counting the six-year period from the last act of tax evasion or fraud. It gets worse. Although the IRS is limited to how far back it can look when filing charges in criminal court, there is no statute of limitations for civil tax fraud. This means the IRS can look back as far as it wants when suing for civil fraud. In practice the IRS rarely goes back more than six years because it has a high enough burden of proof to meet in fraud cases without having to deal with the added difficulties of proving older charges. Civil tax fraud does not include jail time but it can include severe penalties along with the stigma of being liable for “fraud.” Civil penalties include I.R.C. § 6663 Civil Fraud which carries a penalty of 75% of the tax underpayment due to fraud and I.R.C. §6651(f) Fraudulent Failure to File which carries a possible penalty of 75% of the unreported tax. The term “fraud” means an “intentional wrongdoing on the part of the taxpayer motivated by a specific intent to evade a tax known or believed to be owing.” Stolzfus v. United States, 16  I  TA X S E A S O N 2 017

A taxpayer can commit tax fraud and be punished with civil penalties under 26 USC § 6663, without being charged with criminal tax evasion.


Audit Advisor Adam Fayne

398 F.2d 1002, 1004 (3rd Cir. 1968), cert. denied, 393 U.S. 1020 (1969). The IRS must establish fraud by clear and convincing evidence. It is presumed that the entire underpayment is attributable to fraud unless the taxpayer can establish otherwise by a preponderance of the evidence. IRC § 6663(b). Also the IRS cannot impose the civil fraud penalty unless a return has been filed. IRC § 6664(b). However, the fraudulent failure to file penalty may be imposed if no return is filed. IRC § 6651(f). Auditors are trained to look for tax fraud and look for common types of suspicious and fraudulent activity, such as: • Overstatement of deductions and exemptions. • Falsification of documents. • Concealment or transfer of income. • Keeping two sets of financial ledgers. • Falsifying personal expenses as business expenses. • Using a false Social Security number. •  Claiming an exemption for a nonexistent dependent, such as a child. • Willfully underreporting income. Although auditors are trained to look for fraud, they do not routinely suspect it. This article is continued on www.


Related CPE Quiz on Page 29

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

Maximize Your Loyalty by Minimizing Your Clients’ Tax Bill



lthough the prospect of comprehensive tax reform is top of mind for many tax advisors, the 2017 filing season is based on rules that are known and won’t change. Year-end tax planning is generally no longer available, so what can tax professionals do to get the biggest bang for their clients’ tax buck? Congress took the uncertainty out of many popular individual and corporate tax provisions and credits with the passage of the Protecting Americans Against Tax Hikes Act (PATH Act) of 2015. The PATH Act made permanent many provisions like the research and development (R&D) tax credit that in previous years were left to expire at the end of one year only to receive retroactive renewal at the end of the next. Solidifying the status of many of these provisions helped with planning in 2016. The IRS was also busy in 2016, with many pronouncements you should be aware of when advising your clients and preparing their returns. The IRS expanded the tangible property regulations de minimis safe harbor, which allows businesses to deduct more expenses for tangible property purchases. Other IRS developments, while not affecting individuals and businesses for their 2016 year-end, will have a significant operational impact. When discussing 2016 returns, don’t miss the opportunity to discuss the proposed partnership audit changes that will require new compliance processes for partnerships and their partners and LLCs and their members. Also, the estate planning landscape may change under the new Administration. However, make sure your clients are aware of the recently proposed family valuation discount changes that could significantly affect popular estate and gift tax planning strategies. Tax season is the perfect time for you to discuss with your business and individual clients all of their planning

opportunities and potential strategies for lowering their current and future tax bills.

Individual Savings

With Charitable Contributions, the Form is Everything. Supporting your charitable contributions with the correct form is critical, as the IRS has been very aggressive in denying deductions for improper reporting without consideration of the facts. If the gift is under $250, taxpayers are expected to substantiate the deduction through a canceled check, receipt or documented communication from the charitable recipient. If the contribution exceeds $250, the taxpayer must receive from the charity a substantiation letter that includes a statement that the taxpayer received nothing of value in exchange for his contribution. If the contribution is of property (except publicly traded stock) that exceeds $5,000 in value, the taxpayer must have a qualified appraisal, by a qualified appraiser, of the value. The IRS has been particularly aggressive about its enforcement of the appraisal requirement; if a taxpayer cannot produce the appropriate letter from the charity or has not attached the qualified appraisal or summary, as needed, the IRS is likely to determine that the donation is ineligible for the tax deduction. And that is based purely on the form, regardless of whether the taxpayer can prove all of the elements of the donation when it is challenged. Make Sure Your Clients are Gifting. The gift and estate tax, with its 40% maximum rate, can be one of the largest taxes your client is likely to pay. Implementing strategies to reduce their tax liability is essential. One of the key ways clients can reduce their gift and estate tax is through the use of the annual gift exclusion. In 2016, an individual could make a $14,000 gift taxfree to each beneficiary. Married couples can split their gifts, so they can give up to $28,000 to each beneficiary without

the gift being subject to the gift and estate tax. If clients are in community property states, gifts of community property are automatically “split.” Nevertheless, preparers should always elect on the tax return to split the gift in order to eliminate the possibility that the gift was made from separate property. To minimize the recipient’s tax liability, he can roll the money into a Roth IRA or use it to pay down student loan interest. Certain expenses paid on behalf of another person, such as tuition costs and medical expenses, will not trigger a gift and estate tax liability. Making payments directly to a provider is not considered a gift for tax purposes. In the event a gift exceeds the annual gift exclusion amount, utilizing the lifetime transfer exemption can also lower your estate tax. In 2016, the lifetime transfer exemption is $5,450,000 per person. Use Family Valuation Discounts While They’re Available. Family-controlled entities have frequently used minority interest and lack of marketability discounts to lower the value of ownership interests in family entities transferred to other family members. The discounts allow more wealth to be transferred to family members without being subject to gift and generation skipping transfer taxes, so they are popular estate planning tools. The minority interest and marketability discounts can be as high as 30% if taken together.

This article is continued on

Bill Smith is a Managing Director with CBIZ MHM National Tax Office. He consults nationally on a broad range of tax services, including foreign and domestic transactional tax planning for corporations, partnerships, LLCs and individuals.

Manage, Enhance and Expand Your Practice  TA X S E A S O N 2 017   I  17

CPAs’ Role Grows After Estate Tax Repeal BY MARTIN M. SHENKMAN, CPA, MBA, PFS, J.D.


onald Trump won the Presidency and the Republicans control both the House and Senate. Republicans have long wanted to abolish the estate tax, or as they have labeled it the “death tax.” President Trump included in his pre-election platform abolishing the estate tax. Regardless of the outcome of this proposal practitioners need to consider how a repeal of the estate tax, and other possible outcomes, might affect their clients. The practical reality is that the federal estate tax has not affected many clients for years since the exemption was raised to a $5 million inflation adjusted level. However, regardless of the outcome of the efforts to repeal the estate tax, estate planning will affect

all clients. Regardless of the tax implications to any client, the role CPAs play in the estate planning process should continue to grow, not decline. Following are points to consider about the possibility of repeal and the continued role CPAs can serve.

Repeal of Estate Tax

If the estate tax is repealed practitioners should guide clients to review the entirety of their estate plans. This includes title (ownership) of assets, wills, trusts, insurance coverage and more. Most estate plans, even for smaller estates, may be based on tax oriented planning and clauses. Many clients (perhaps most) have not updated their wills and estate

Repeal of Estate Tax

Example 1: A husband and wife are in a second marriage and both have children from prior marriages. The husband’s will provides that the largest amount that won’t create an estate tax should pass to a credit shelter trust that benefits his current spouse and former children. When the husband’s will was signed the estate tax exemption was $1 million so that amount would have passed to this family trust and the balance to a martial trust (or outright marital disposition). If the estate tax is repealed the entire estate would pass to this family trust likely creating more contention between the current wife and children.

Example 2: Given the same facts as above, except the husband’s will provides

that the amount up to the estate tax exemption should pass to a credit shelter trust that will benefit his current spouse and former children. When the husband’s will was signed the estate tax exemption was $1 million so that amount would have passed to this family trust and the balance to a martial trust (or outright marital disposition). If the estate tax is repealed the exemption is zero and the entire estate would pass to the marital trust cutting out his children. The reality is that the practitioner and/or the client’s attorney must review the exact language in the client’s current will or revocable trust, and the title to assets. If the CPA practitioner is not comfortable evaluating these nuances (in many cases only the paragraph in the will setting forth the funding allocation between trusts) the client can and should be encouraged to consult with his or her estate planning attorney.

18  I  TA X S E A S O N 2 017

plans in many years and those plans may be based on the assumption of a federal estate tax, and in fact a much lower exemption that exists now. So repeal could only serve to exacerbate how disjointed their plan might be. For example, many wills (or revocable trusts if that is the primary document) mandate funding a credit shelter (bypass) trust to avoid estate tax. That entire planning construct might become irrelevant. If CPAs don’t proactively engage clients many will assume “Gee there is no estate tax I don’t have to do anything.” For many clients the specific manner in which their will is worded could result in that assumption being correct, or devastatingly wrong. See examples below.

Repeal of Gift Tax - Forms 709

If the estate tax is repealed that does not necessarily mean that the gift tax will be repealed. Historically, the gift tax has served as a backstop to both the gift and estate tax. If the estate tax is repealed, the gift tax’s role as a backstop to the estate tax is obviated. However, the gift tax may still serve an important purpose to backstop the income tax. Without a gift tax a taxpayer could transfer highly appreciated assets to anyone with net operating loss, a non-resident alien not subject to US income tax, heirs in lower brackets, etc. and have them consummate a sale. So the gift tax may remain. However, retaining the gift tax will retain significant complexity of the transfer tax system and will affect very few taxpayers. So it is possible that the gift tax will be eliminated or retained. If the gift tax is retained then anytime a client makes a transfer that does not meet the present interest requirements, or which exceeds the annual exclusion ($14,000 in 2017), a gift tax return will be required as under current law. Without any estate tax, and such a high gift tax exemption, that filing requirement will be absurd for most clients. See example above.


If the estate tax is repealed practitioners should make an effort to educate clients that existing life insurance and

Repeal of Gift Tax - Forms 709

Example: Jane and Tom Smith have an estate worth $4 million. Their daugh-

ter Cindy was recently married and is buying a house. They gift her $75,000 for the down payment. Since the gift exceeds the $14,000 gift tax exemption (or $28,000 if the gifts are split between Jane and Tom and Cindy) a gift tax must be filed. The aggregate estate is so far below the estate tax exemption for one taxpayer ($5,490,000 in 2017) that the likelihood of a federal estate tax might be insignificant. Does the CPA prepare a gift tax return as required? The law requires it. Would any client in Jane and Tom’s situation be willing to pay a CPA to file a gift tax return? It is highly unlikely. Perhaps the practical answer is for practitioners to add a paragraph on gift tax filing requirements to the general 1040 questionnaire or other communications explaining these requirements and leaving it in the client’s hands to make the decision. It would not be surprising to find that the gift tax is retained and the outdated filing requirements illustrated above to remain. insurance plans (e.g., a life insurance trust) should not automatically be terminated. Life insurance for many clients will retain valuable investment benefits (tax deferred, additional diversification, etc.). For many clients life insurance may prove a valuable planning tool for aging. Clients may have purchased life insurance to pay an estate tax. But with increasing longevity the clients may well live into their 90s or beyond and end up spending down most of their estate for living expenses, health care, nursing homes, etc. What the client initially anticipated, a large inheritance to their children and insurance to cover the estate tax, may now more realistically be longevity, not estate tax, reducing their estate. The life insurance may prove to be essential to their initial plan, but for a very different reason. Even if life insurance is determined no longer to be relevant, practitioners should educate clients to not merely cancel the policy for its cash value (in the case of a permanent

policy) but rather to have an insurance expert evaluate the policy and recommend options. A policy may be sold into the secondary market for much more than cash value. It may be possible to convert the policy into a different type of policy or annuity to thereby repurpose it into something more appropriate to fit the current environment. Too often clients simply react instead of plan.

Forms 1041

Before completing any Form 1041 practitioners should evaluate the trust with the client to determine if it still serves its intended purpose without an estate tax. Even without an estate tax many, perhaps most, trusts will remain viable to protect assets from claimants, divorce, and more. However, the clients may no longer understand the relevance of that trust. If a trust in its present form is no longer optimal, it may be possible to decant (merge) the trust into a new trust that better serves current purposes. It may also be possible, depending on

the terms of state law and the trust instrument, to have the beneficiaries and grantor agree by contract to a non-judicial modification of the trust. While it might be costly, if the other options are not viable, in some instances seeking court reformation of a trust might be worthwhile. In some instances the application of a trust might be modified by changing the nature of the assets or distributions to better conform to the new environment.

Non-Tax Planning

Estate planning never should have been entirely about tax issues. The repeal of the estate tax does not in any manner affect the importance of non-tax planning. Practitioners should guide clients to refocus planning to a range of vital issues, further discussion of which is beyond the scope of this article: planning for aging, asset protection planning, divorce planning and much more.


Whatever happens with estate tax repeal, the role of the practitioner will remain vital to planning. Clients will likely not understand the many nuances of planning and presume that if the estate tax is repealed they need to do nothing. That may be a dangerous mistake in terms of their family and planning. 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.

Manage, Enhance and Expand Your Practice  TA X S E A S O N 2 017   I  19

Firm Spotlight

Courageous Firm Audits NYSE Companies



aloneBailey audits small SEC companies. With 190 SEC registered clients MaloneBailey is 7th in the world for the number of U.S. public company auSteven Vertucci dit clients. MaloneBailey has grown from 1996 with two SEC reporting clients to now auditing the NASDAQ, American Express and New York Stock Exchange listed companies. Mushrooming up to a $15 million dollar firm, it has settled back down to a $10 million accounting firm. I made the drive to Houston to speak with managing partner Steven Vertucci, CPA and learn about him and this courageous firm.

How did you get into accounting? I took one of each basic business discipline course in college. I had a great accounting professor, Dr. Margaret Shelton. I was hooked after the first class. I enjoyed the topic but she made the topic interesting and it stuck.

What do you like best about being a CPA? We never stop learning. The accounting field continually adapts to changes in business and the economy. CPAs are constantly gaining education to keep up with change. This keeps what we do fresh and offers ongoing challenges which I enjoy. Additionally, when you specialize in an area as I do with audits of publicly traded companies, you are truly offered an opportunity to be a thought leader. The CPA designation is the gateway to that opportunity and many others. 20  I  TA X S E A S O N 2 017

How did MaloneBailey change the way audits are conducted for small public companies? We embraced the idea of the remote approach to auditing. This allowed us to operate outside of our local area and by doing this we were not only exposed to companies but also to other professionals that serve those companies regardless of where the company was located. Our network of professionals we work with grew exponentially since they themselves were generally located somewhere other than our local market. We also made auditing small publicly traded companies an industry specialization. No other firm was attempting to accumulate the volume of companies we were. Rather than having a traditional practice that might have a few public companies, we made it the centerpiece of our practice. This allowed us to be the first non-national firm to hit the 100 mark for public companies. We did this in 2007 and have stayed above 100 ever since. We currently have around 200 and remain the only non-national firm to audit more than 100 and are one of 10 firms in the world who can say that. See the link https://pcaobus. org/Inspections/Pages/InspectedFirms.aspx.

What changes were made to the standard CPA firm practice model? We adopted the remote model approach. In early years, we also focused more on building the practice by bringing in partner level candidates to provide more partner time per engagement. In later years we filled out the bottom of the more traditional pyramid but leveraged experienced people as we built the SEC practice.

The larger firms did not want to do these small company audits because they could not get the fees. It was hard to get information from the SEC pre-Internet. Malone’s first move was to hire a financial reporting manager from Compaq computers to bolster the experience of SEC reporting. When he came over Malone brought people in at the partner level to specialize in small company public audits. Malone attracted key securities attorneys who had a few public company clients. Malone could deliver on time and at the right price and get ongoing referrals. Some work came from local CPAs who may not have SEC experience. Malone’s volume created efficiencies by dropping other work and focusing on SEC work. We navigated the rules to get them registered and give them fair fees. Other firms had higher salaries in the northeast and on the west coast. Southern salaries made Malone more cost efficient. We became more workflow efficient and grew sophisticated. We continued to give them the service they expected from the small firm down the street. Technology helped perform remote auditing. Today we use a Sharefile site like lockbox to drop documents into folders and then we are alerted. High speed scanning helped. The migration to CCHs fx engagement to paperless makes it easier. CaseWare was useful. The documents are updated automatically. KnowledgeCoach has a battery of questions about the company and tailors the audit programs necessary to prepare the audit. It builds the audit questions to determine the

“The PCOAB reviews are rooted in the SAARs. They require three reviews of three quarterly 10Q filings. So it is regularly.” them so often. These have translated into lower fees since our time is spent efficiently for each project.

How do you provide timely service in this yearend centric environment? Public companies have deadlines. When 90% of your client base is public companies with generally four deadlines a year, you become accustomed to having and meeting deadlines. The deadline focused nature of our practice has demanded timeliness in what we do. There are consequences for SEC issuers not filing timely which we understand and take their deadlines seriously.

How do you maintain quality audits and SEC filings?

Steven Vertucci, managing partner of MaloneBailey. audit steps necessary and determine risk. It has a robust set of analytics when you have a special case. Now the system makes you aware of what you must do. It does simple things like: you must complete and link back to the other portions. After year one, you can become even more efficient. Some firms cannot do public companies because of professional liability issues. There is greater business risk because the users of public financial statements can be anybody. PCOAB has its own standards. The audit risk is the same; you just have two additional regulatory bodies, the PCOAB and SEC. Every public company requires PCOAB compliance. CPA firms doing over 100 firms get an inspection every year. Reg A, Tier 2 audits can be under GAAS standards. The PCOAB reviews are rooted in the SAARs. They require three reviews of three quarterly 10Q filings. So it is regularly. The

turn-around for the annual audit usually takes until February. The smaller companies do not have the internal control requirements. Year-end for a public company audit is just one part. You have the SEC 10K requirement which requires other people to sign off. The financials and footnotes are a small piece of the filing, less than 50%. The rest of the 10K must be prepared by management after the audit is filed.

How does a CPA firm change to serve smaller SEC companies and reduce costs? We allowed our volume building to create a platform for developing processes in performing audits of smaller SEC issuers. Our training is and has always been tailored to the SEC. Our people spend 90% of their time doing SEC work so they are very proficient and have a high exposure to issues SEC filers face. They don’t constantly have to research the same topics since we see

Since we are only one of 10 firms in the world with more than 100 SEC filers and we have such an ultra focus on public company work, our work is highly scrutinized by the PCAOB. We are one of only 10 firms that have an annual inspection while everyone else has triennial inspections. Our volume creates a reality where we are dealing with SEC either directly or indirectly on a very frequent basis. Both PCAOB and the SEC are sophisticated regulators and our regular exposure to them requires we maintain quality in all we do.

When should a CPA firm consider auditing the new Regulation A+ public companies? Reg. A+ companies are required to have an audit. These audits can be done under GAAS and don’t require PCAOB standards. This opens the door for non-PCAOB audit firms to work on these audits. However, CPA firms that don’t regularly work on SEC issuers should approach Reg A+ companies assuming they may want to eventually go public. If that is the case, those companies are going to want to use those previous audits. If the CPA firm is not interested in auditing public companies they should generally avoid auditing Reg A+ companies. If the offering is

Continued on page 22

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Firm Spotlight

it” and instead made the decision to take the entire practice paperless all at one time. We moved forward and never looked back.

How do you perform remote auditing? Continued from page 21 successful the firm will need a PCOAB audit and will ask to have the opinion upgraded, and the firm may not feel comfortable to perform, and then the firm has to be re-audited. Reg. A+ Tier 1 and Tier 2 have been qualified but they have not raised a lot of money especially Tier 1. At least Tier 2 has companies behind it.

What do you see as the potential for the crowdfunded companies made possible as a result of the JOBS Act? Mainly access to investors that otherwise would have been out of reach. Crowdfunding also offers up a new platform for raising capital that didn’t exist prior to the JOBS Act. The potential is there for these companies; the challenges have been letting the regulatory environment mature so everyone involved knows what’s required. There are four or five approved portals for Tier 2, Reg A+ raises for qualified investors. There was some resistance from broker/dealers. Not a lot has happened with it; it is still a mystery. There appears to be a problem with the portal determining and validating the status of the investor qualified to raise the money.

How does a CPA firm transition to a 100% paperless approach? You have to jump in and not look back. Change can be challenging and there are reasons firms can come up with on how paperless is too different or too difficult. It is different and can be challenging but it is widely adopted so many firms have proven it can be done successfully. The best thing we did when we went paperless in 2005 was to not do it in steps. We fought the urge to “try 22  I  TA X S E A S O N 2 017

For remote auditing to be most effective, a paperless approach is needed and firms will need to invest heavily in technology to assist them with the transition and execution. You need a culture that focuses on technology and provides the tools to audit from anywhere.

“It is important to note that remote auditing cannot replace the need to be onsite if facts and circumstances require it. “ It is important to note that remote auditing cannot replace the need to be onsite if facts and circumstances require it. We look at every project with the question of what does the project need and require based on what’s going on with the project. One size and one approach does not fit all companies and situations. Auditing still remains an art. In some cases you don’t have to be onsite, and can be there with less time. We are more efficient at our desks. Everyone has four monitors on their desks and a docking station. We can handle a higher volume of clients, and have no down time and expense to set up at a remote site. We are only working on clients when they are ready. We are not waiting. It limits non-productive time. We can work from anywhere. Malone embraced the idea, we can audit from anywhere. Some staff have an extension of the office as if they are in the office. It accom-

modates the accountant. One monitor is all email. Another is dedicated to CCH product. The other one may be the Internet for research. You may have a lead sheet on one screen, the bank reconciliation on another and the trial balance to confirmation, rather than flip from one screen to the other. Gone are the days of printing and redlining the financial statements. You can verify; and as the audit partner you can keep all the tasks open at once. We can abandon printing. After four monitors there is a diminishing return. The desk will usually accommodate only four. John Malone had a special rack to hold five monitors. All seniors can have three or four monitors at home. What we have learned from the remote approach is the auditors love it, and don’t have to live out of a suitcase and be away from home. It has made it easier to recruit. All the brainpower is here at the office to solve issues and get answers. It’s a great environment to learn from.

What advice would you give new CPAs? Receiving your CPA license is just the beginning, not the end. While it is an extraordinary accomplishment, it is the first of many milestones and goals in a CPA’s career. Enjoy the moment, and prepare for a career of equally challenging moments. I joined the firm when there was only John Malone, another partner and a senior auditor. I stayed with the firm because of the direction of the firm. Malone was only auditing a couple public companies at the time. Malone built the firm focused on this approach. In 2011 Malone opened two offices in China to serve public company clients there. George Chin came from Deloitte to be Malone’s practice leader in China and do basically the same thing we do here.

What do you do with your free time? I enjoy spending time with my family. We enjoy water activities so we’re always looking for something near the water in the summer.

Software Helps with ACA Uncertainty



he Affordable Care Act, or Obamacare, has made just as much of an impact in the accounting world as it has politically. Tax professionals and software vendors alike have scrambled to implement processes and products in payroll processing software to ease the transition and stay on top of this fluctuating regulation. There are several key points software vendors have offered to make sure tax professionals keep their clients safe and free from costly fines. “One very important thing to remember is that, for employers who need to comply with ACA Reporting (Obamacare), tracking employee information, Ken Hilton as well as employee family information, is a necessity within the accounting software,” said Ken Hilton, president of Red Wing Software. “While the ACA may be a moving target for the foreseeable future, until the law changes, employers need to comply. One example is preparing Forms 1094-C and 1095-C,” said Vic Vic Saliterman Saliterman, senior vice president of ADP Health Care Reform. “In fact, a recent ADP study showed that about 40% of organizations reported spending more time on Forms 1094-C and 1095-C than IRS estimates. And about 40% of employers handling ACA compliance internally did not meet the original deadline for distributing Form 1095-C to their employees.” “The IRS continues to remind taxpayers who have Marketplace coverage to go to the Exchange when their income changes or when they qualify for workMike D’Avolio place coverage, otherwise they’ll need to pay part or all of the ACA subsidy (Advance Premium Tax Credit) back,” said Mike D’Avolio, tax specialist

and customer liaison with ProConnect Group. “IRS figures show 51% of filers hit the income cap and had to repay an average of $860.  Taxpayers may be unaware they still had Marketplace coverage because they 1) are auto-reenrolled by Healthcare. gov or State Marketplace; 2) have a lowcost plan with no additional contribution; and 3) the subsidy is transmitted directly to health plan.” “A valuable function to keep in mind when it comes to accounting and payroll is to make sure the program you’re using to track FTE requirements can integrate Ray Barlow with your payroll solution,” said Ray Barlow, vice president of Sage Accountant Solutions. “The ability to automatically track FTE requirements and determine who qualifies, then roll this information directly into an accounting solution, will eliminate the need to manually calculate and re-enter this information into existing payroll software.” Various functions throughout the software cannot only guide clients through the process of managing government-mandated healthcare but stop them from accidentally falling into legal entanglement. “An integrated ACA solution can help track employee work status for each month, who was offered coverage, and whether that coverage met affordability standards,” said Saliterman. “It also will ultimately provide several years of employee data which may be needed to respond to an IRS inquiry.” “The trick comes down to whether software can organize that data in useful ways,” said Fred J. Ode, chairman and CEO of “For example, measureFred J. Ode ment groups and measurement periods are a new dimension to payroll tracking brought by the ACA. Users need to be

able to define and control these easily so they can track eligibility without resorting to complex spreadsheets or guestimates.” “For individuals, the tax return implications of the passage of Affordable Care Act are extensive, and software packages are critical for reporting the new requirements accurately,” Mark Luscombe said Mark Luscombe, JD, LLM, CPA, principal federal tax analyst at Wolters Kluwer Tax and Accounting. “Increased taxes reported on Form 8959, Additional Medicare Tax, and Form 8960, Net Investment Income Tax, calculate the additional tax automatically, with Form 8960 including an allocation of state tax payments to net investment income to reduce the taxpayer’s net investment income tax.” “Forms 1094-B and 1094-C and Forms 1095B and 1095-C to employees—the disbursement date has been extended to March 2, 2017,” said James Paille CPP, director of operaJames Paille tions for Thomson Reuters myPay Solutions. “The date for forms filed to the IRS on the AIR system is still March 31, 2017.

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OBAMACARE ACCOUNTING SOFTWARE ADP Intuit ProConnect Red Wing Software Sage Accountant Solutions Thomson Reuters Wolters Kluwer Tax and Accounting

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Tax Consideration of Identity Theft BY SIDNEY KESS, CPA, J.D., LL.M


n its annual release in 2016, the Federal Trade Commission noted that reports of identity theft increased more than 47% from 2014 to 2015 Sidney Kess ( news-events/press-releases/2016/03/ftcreleases-annual-summary-consumer-complaints) and tax-related identity theft is a big part of this fraud. Identity theft has been the top category for frauds reported to the FTC for the past 15 years.

Identity Theft

Identity theft can take many forms. Thieves can obtain personal information (e.g., birth dates, Social Security numbers, bank and other financial accounts) to access financial accounts or use the personal information to establish accounts that are then used to make purchases or obtain loans for which the taxpayer may be on the hook. Almost half of all personal information is obtained from lost or stolen mobile devices: laptops, tablets and smartphones. From a tax perspective, if a taxpayer is victimized and the action amounts to a theft under state law, any unreimbursed losses are deductible as a theft loss (Code Sec. 165(c)). Key points about a theft loss deduction: •  The taxpayer must itemize deductions. • The first $100 is not deductible. • Only losses in excess of 10% of adjusted gross income can be deducted. Obtaining protection. Some homeowners’ policies provide coverage for identity theft; others do not but often coverage can be added for a modest cost. Individuals can obtain separate identity protection insurance. 24  I  TA X S E A S O N 2 017

Alternatively there is protection through a credit monitoring service to help detect identity theft before significant financial losses occur. Some credit monitoring services also provide credit repair services to help an individual get back to pre-identity theft condition, and obtain reimbursement for lost wages when taking time off to combat a theft. Each policy or service may set limits on coverage, require deductibles, or have other conditions. At present, premiums for identity theft insurance and the cost of identity theft protection services, such as LifeLock and Identity Guard, are not deductible; these costs are viewed as a nondeductible personal expense.

Tax-Related Identity Theft

Tax-related identity theft occurs when a thief uses a taxpayer’s identity to obtain a bogus tax refund. The taxpayer may be unable to e-file his/her legitimate tax return for the year because one has already been filed under the taxpayer’s Social Security number. Even worse, a thief may use a taxpayer’s personal information to get a job and the thief’s employer reports the income but the taxpayer, unaware of the income, omits it from his/her return and then receives a bill from the IRS for unpaid taxes. The IRS has been working to combat tax-related identity theft and was able to detect and stop more than 3.8 million suspicious returns in the 2015 filing season (IRS, Global Identity Theft Report (May 31, 2015)). Nonetheless, identity theft continues to top the IRS’ Dirty Dozen Tax Scams ( uac/newsroom/irs-wraps-up-the-dirtydozen-list-of-tax-scams-for-2016). These scams occur when criminals impersonating IRS agents try to collect bogus taxes on the threat of arrest, deportation, loss

of licenses, and other actions as well as phishing where identity thieves try to steal personal information. In response to the phone scams, the IRS said in an internal memorandum on May 20, 2016, that it would not make any initial audit contact with a taxpayer by phone, only snail mail will be used for this purpose. Report identity theft. If a taxpayer knows that his/her personal information has been compromised, the taxpayer can file Form 14039, Identity Theft Affidavit; this puts the IRS on the alert. The form is mailed to the IRS, along with a copy of the Social Security card, driver’s license, passport, military ID, or other government-issued form of identification. Obtain an IP PIN. A taxpayer can obtain an Identity Protection Personal Identification Number (IP PIN), which is a six-digit number used in place of a Social Security number when filing a tax return. The IRS will issue an IP PIN under three scenarios: • Taxpayers who the IRS has identified as ID victims. The IRS expects to send about 2.7 million IP PINs by mail later this year for use in the 2017 filing season.

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Related CPE Quiz on Page 29

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

Prove Your Worth Through Sales Tax Recommendations



PAs are much like doctors in that their clients, or patients, come to them for all the answers in the financial field whether it is the CPA’s specialty or not. Such questions often revolve around sales tax software: Which product should I use? Which products satisfy my business’ needs? Does my business even require this type of functionality? Clients think their CPA is an expert; it is in the CPA’s best interests not to prove them wrong. There are numerous things to consider when making a recommendation of sales tax software to a client. A bad recommendation can be as detrimental to a CPA’s reputation as the absence of one. “Taking the time to understand your client’s business and the requirements is critical as automation needs may vary significantly depending on the nature of the Ken Crutchfield business model, the tax complexity of the items being sold, the client’s nexus profile, the volume of sales transactions and the types of taxes the client is subject to,” said Ken Crutchfield, vice president of software products at Bloomberg BNA. “Another key consideration is the ability of a sales tax automation solution to integrate, or connect, with a broad variety of accounting, ERP, mobile commerce, Julie Lubetkin e-commerce, payment, and CRM technology products,” said Julie Lubetkin, VP of marketing, channels and partnerships at Avalara. “For instance, if the CPA’s client runs their business on NetSuite and sells their products online using the Magento e-commerce platform, the

sales tax software that’s selected should be pre-integrated with these solutions for ease of adoption and the best user experience.” There are many bells and whistles associated with sales tax software products. A CPA should have at least a general knowledge of most of them and be able to know which ones are most valuable to his or her clients. While some features may not be of much help to a client, the usefulness of others will have a CPA seem like the most knowledgeable professional in the industry to clients. “Some of the key features include the ability to precisely determine taxation jurisdictions to the local level and support the precise taxation rules for a particular product or service,” said Mike Sanders Mike Sanders, vice president, product management at Wolters Kluwer Tax and Accounting. “Additionally, the software must provide the ability to utilize the taxation data for not only recurring filing requirements, but also customer service inquiries, financial review and reconciliation as well as future audit support.  Having access to this level of revenue and taxation information is key to the CPA over the long-term.”

Service Augments Technology

“The most valuable functions of sales tax products are those that combine software and services to help businesses identify, validate and correct tax boundary and rate issues to address, imprecise methods used for jurisdiction determination (e.g., ZIP code), challenges in determining whether a location is inside or outside of city limits, incorrect or out-of-date ZIP+4 or street address data and missed tax rate and

boundary changes,” said Crutchfield.

Real-Time Results are Crucial

“The most valuable function of sales tax automation software, especially cloudbased solutions, is the ability to provide real-time sales tax rates and rules data across thousands of jurisdictions nationwide and internationally, as well as giving clients the option to outsource their sales tax returns, remittance and exemption certificate management obligations to a trusted provider,” said Lubetkin.

Tax Challenges by Industry Can Provide Customized Results

“The valuable functions featured in sales tax software include end-to-end support – from determination to reporting to compliance, specialized support for tax challenges Carla Yrjanson by industry and control and customization to address unique business needs,” said Carla Yrjanson, VP of tax research content at Thomson Reuters. It is not how knowledgeable a CPA is in a certain aspect of the accounting industry but how knowledgeable they can become. A good recommendation, particularly with sales tax software, can be worth as much to a client as a successfully filed 1040.

SALES TAX SOFTWARE Bloomberg BNA Avalara Wolters Kluwer Tax and Accounting Thomson Reuters

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CPA Magazine‘s

2017 Buyers Guide Email Encryption AccountantsWorld AP Accounting Power® Accounting Power AppRiver Ace Cloud Hosting CipherPost Pro™ QuickBooks and Tax Software Hosting 888-999-1366 Cloud-based Accounting Power puts you back in con866-223-4645 trol of client accounting. It combines a comprehenCipherPost Pro™ makes it simple to encrypt your 855-ACE-IT-UP sive professional accounting system and bookkeepconfidential emails from sender to recipient, and Winner – Best Hosting Provider @ Accountex ing for you and your clients. Call for a live demo. know when they’re opened and read. Office 365 2016 | QuickBooks/Tax Software Hosting starting @ compatible! $19.50/user/month | Free Consultation | 24X7 SupTrintech port, 99.995% Up-Time, Secure and Super-fast SSD Cadency, Financial Planning Servers ReconNET, Leimberg & LeClair T-Recs, UPCS and SmartTreasury AccountantsWorld AP Accounting Power® NumberCruncher Accounting Power www. 800-317-7998 610-924-0515 Trintech’s portfolio of financial solutions manages 888-999-1366 Check out our NumberCruncher software program all aspects of the financial close process, increasing Cloud-based Accounting Power puts you back in con- efficiency and effectiveness, reducing costs and that calculates over 100 client-presentable instant trol of client accounting. It combines a comprehenillustrations and explanations of GRATs, Private Animproving governance and transparency. sive professional accounting system and bookkeepnuities, Charitable Lead and Remainder Trusts, and ing for you and your clients. Call for a live demo. other state of the art estate and financial planning Cloud-based Tax Preparation, concepts. Compliance & Workflow Greatland Yearli Desktop Wolters Kluwer Payroll & Online Filing Program CCH Axcess 24Hour Payroll, Inc. 24/7 Service Provider Payroll Software 800-968-1099 Yearli ® is a complete federal, state and recipient 800-739-9998 W-2, 1099 & 1095 reporting platform designed to The right technology can fuel growth, support efhelp you generate, file, print and mail all related fective management and protect a firm’s reputation. 844-667-2424 forms. That’s CCH Axcess™ Wolters Kluwer’s cloud-based tax Payroll software for Service Providers. Intuitive, comprehensive, affordable. No maintenance or per preparation, compliance and workflow solution. check fees! Installs on a cloud, network server or Cloud Accounting stand alone PC. Construction Accounting Ace Cloud Hosting QuickBooks and Tax Foundation AccountantsWorld PR Payroll Relief ® Software Hosting Software, Inc. Payroll Relief FOUNDATION ® Construction Accounting Software 855-ACE-IT-UP 888-999-1366 Winner – Best Hosting Provider @ Accountex The key to highly profitable payroll processing? 2016 | QuickBooks/Tax Software Hosting starting @ 800-246-0800 Automation. With Payroll Relief, you can automate $19.50/user/month | Free Consultation | 24X7 SupFOUNDATION ® is a job cost accounting and project compliance tasks and eliminate data entry for a port, 99.995% Up-Time, Secure and Super-fast SSD management software for contractors. It’s available more profitable, no-hassle payroll service. Call for a Servers traditionally installed or on the cloud and offers live demo.. integrated mobile applications. Accounting



presents ADP HCM and Payroll solutions 844-400-1ADP Companies of all types and sizes around the world rely on ADP’s cloud software and expert insights to help unlock the potential of their people. CheckMark, Inc. CheckMark Payroll Service 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. Payroll4 800-949-9620 is a payroll processing and reporting service built just for contractors, to make it easier to tackle certified payroll, union, prevailing wage and more. Red Wing Software CenterPoint Payroll 800-732-9464 Accountants benefit from features that make processing client payroll easier. Simplify processes and add profits to your bottom line with CenterPoint Payroll.

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TPS Software, Inc. TPS Time & Billing www. 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.

Professional Liability Herbert H. Landy Insurance Agency Professional Liability Insurance | 800-336-5422 Insuring accounting professionals since 1962. Coverage for firms of all sizes and practices. Exceptional service, competitive pricing and coverage provided by an A+ rated insurer. The Landy Difference. Mitchell & Mitchell Insurance Agency, Inc. Professional Liability Insurance 800-562-4272 We represent the AICPA Professional, Cyber and Employment Practices Liability Programs. Experts in business, personal and medical lines of insurance, tailored to the accounting industry.

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

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CPA Magazine‘s

2017 Buyers Guide Tax Season 2017 Volume 17, No. 1

Continued from page 27

Tax Preparation continued

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Drake Software Drake Software 800-890-9500 Drake Software offers value and incredible support in a complete tax preparation software for professionals.

Trust Probate Accounting All inclusive 1099 print, mail and e-file service is a leading IRS-authorized e-file provider offering all-inclusive print, mail, and e-filing services for 1099, W-2 and ACA Forms. Greatland Yearli Desktop & Online Filing Program 800-968-1099 Yearli ® is a complete federal, state and recipient W-2, 1099 & 1095 reporting platform designed to help you generate, file, print and mail all related forms.


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Time and Billing HMS Software TimeControl 647-478-8332 TimeControl is the multi-purpose timesheet system from HMS Software. TimeControl’s flexibility has made it one of the most popular timesheet systems in the world.

28  I  TA X S E A S O N 2 017

Delta Data, Inc. Trust Accountant 888-760-8039 Trust Accountant, considered the premier trust and probate accounting program in its price range. It’s a real-time portfolio accounting software program designed to enable CPAs, attorneys, etc. to easily and cost effectively manage fiduciary and individual accounts.

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Write Up PC Software Accounting, Inc.

Client Write Up

800-237-9234 Our client write up program was rated 2nd behind QuickBooks in CPA Practice Advisors, Readers Choice Survey 7 years in a row. Sophisticated reports, yet very fast and easy to use. Great interfaces including QB. We are owned, programmed and supported in the United States and very reasonably priced.

Editor T. Steel Rose, CPA, ACG Managing Editor Joshua Fluegel Copy Editor Myrna Nelson Advisory Board/Columnists Sidney Kess, CPA, J.D., LL.M Jerry Love, CPA/PFS, CFP, CVA, ABV, CITP, CFF, CFFA Robert E. McKenzie, J.D. Adam Fayne Martin M. Shenkman, CPA, MBA, PFS, J.D. Publisher Angie Rose Buyers Guide Chelsea Patterson Production Andrea Bergeron Paul Subscription Changes Joshua Fluegel The opinions given by contributing authors are their own and are not necessarily the opinion of our staff and management. All trademarks used are the property of their respective owner. CPA Magazine (ISSN# 2378-7481) is published four times a year by CPA Magazine, P.O. Box 92342, Southlake, TX 76092, 817-416-6650 and 888-610-1144 Standard Mail postage paid at Sussex, WI 53089 ©2017 All Rights Reserved Magazine Publishing Group, Inc. Printed in the U.S.A.

If you need CPE, study this issue and complete the quiz today. Submit via email, fax or mail.

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 February 1, 2018 Disasters, DOL Regulations and IRS Audits

You may earn continuing professional education by studying the articles in CPA Magazine. To be eligible for CPE credit, you should spend approximately three to six hours reading, reviewing and studying the material in the current issue followed by answering the self-study test questions. Certify that you have completed the study requirement for this exam by submitting a signed copy of the test via email (josh@, fax (817-756-7252) or mail (CPA Magazine, P.O. Box 92342, Southlake, TX 76092). Course material and a PDF version of the test can be found at A certificate documenting the CPE credits will be issued via email for each examination score of 70% or higher.

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

Tax Season 2017: Answer the following 15 questions and complete the answer sheet on page 31. 1.  Which of the following is not considered a nonbusiness casualty event or “other casualty?” A. Terrorist attacks. B. The collapse of a deteriorating retaining wall. C. Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster. D. Storms, including hurricanes and tornadoes.

3. Losses to business or investment property are fully deductible; they are not reduced by ____ and are not subject to the 10%-of-AGI limit. A. $100 B. $150 C. $170 D. $250

2. Instead of obtaining an appraisal, the cost of repairs to the damaged property is acceptable evidence of the loss in value if all but which one of the following is true? A. The repairs are necessary to restore the property to its pre-casualty condition. B. The amount spent for repairs is not excessive. C. The repairs relate only to the damage suffered in the casualty. D.  The value of the property after the repairs exceeds its value immediately before the casualty.

4. On May 18, 2016, President Obama announced the Department of Labor’s final rule updating regulations which sets the salary level at _______ annually for a full-year worker to be exempt from overtime. A. $46,382 B. $47,476 C. $49,857 D. $51,211 Continued on page 30 Manage, Enhance and Expand Your Practice  TA X S E A S O N 2 017   I  29

for 3 $25 CPE Hours


Continued from page 29

5. Which of the following is not a characteristic of a workweek in regard to compensating employees in accordance with the Department of Labor’s regulation? A. A workweek can begin on any day of the week. B. A workweek should be seven consecutive days. C. Once established, a workweek should not be changed unless for a business reason. D. A workweek can be changed an unlimited number of times for business reasons. 6. Which of the following is not a listed reason information as to the owners and their relationships for each LLC entity should be obtained. A. This may be essential to the interpretation of the operating agreement and what must be done to approve the particular transfers your client wishes to make. B. In the future this may be essential to determine the applicability of the 2704 valuation discount restriction rules. C. This may be essential when gifting shares of an LLC to a nonrelative. D. All of the above is a reason. 7. In order for an appraiser to conduct an MAI appraisal of each real estate property owned by an LLC so a “qualified appraisal may be completed,” the appraiser will require all of the following pieces of information except: A. Rent rolls B. Survey C. Projected operating expenses and rents D. Leases 8. The IRS’ statute of limitations to audit tax returns for tax crimes is generally three years. It is six years if over _____ of income has been omitted from the original filed tax return. A. 18% B. 20% C. 25% D. 32% 9. Which of the following are auditors trained to look for when searching for tax fraud? A. Overstatement of deductions and exemptions. B. Keeping two sets of financial ledgers. C. Using a false Social Security number. D. All of the above.


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3 Hours of CPE

10. Which of the following is a key point about a theft loss deduction? A. The first $200 is not deductible. B. The taxpayer must itemize deductions. C. Only losses in excess of 12% of adjusted gross income can be deducted. D. Only losses in excess of 18% of adjusted gross income can be deducted. 11. A taxpayer can obtain an Identity Protection Personal Identification Number (IP PIN) to use in place of a Social Security number when filing a tax return. The IRS will issue an IP PIN under which of the following scenarios: A. Taxpayers who file Form 14039. B. Taxpayers who the SSA has identified as ID victims. C. Taxpayers who were unable to file due to a fraudulent return already being filed. D. Taxpayers who live in New Mexico, Colorado, and North Carolina, which are areas that are part of a pilot program on combating ID theft. 12. Research Tax Credits (RTCs) can generally be either carried back 2 years or carried forward up to ____ years before the RTCs could expire unutilized. A. 20 B. 23 C. 28 D. 30 13. Businesses with less than $ 5 million in gross receipts in the current taxable year can offset the employer portion of (the)________________ by up to $250,000 for each year. A. Research Tax Credit B. Old-Age, Survivors, and Disability Insurance C. Alternative Minimum Tax  D. Research and Development Tax Credit Program 14. As of 2015, Congressional budget cuts have resulted in a reduction of which type of employee every year since 2010? A. Revenue Officers B. Revenue Agents C. Special Agents D. All of the above 15. Due to reductions in its budget, in 2016 only 72.6% of calls to the IRS help line were: A. To the correct branch of the IRS B. Resolved C. Picked up by the automated recording system D. Answered

for 3 $25 CPE Hours


Course Title: Disasters, DOL Regulations and IRS Audits Mark your answers here.

Total due: $25 for 3 hours of CPE credit. Submit: Certify that you have completed the study requirement for this exam by submitting a signed copy of the test via email (, fax (817-756-7252) or mail (CPA Magazine, P.O. Box 92342, Southlake, TX 76092). Course material and a PDF version of the test can be found at Payment: Include credit card info on form, call 888-610-1144 to supply credit card info or send check. Name                       

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10. A ❍  B ❍  C ❍  D ❍ 11. A ❍  B ❍  C ❍  D ❍ 12. A ❍  B ❍  C ❍  D ❍ 13. A ❍  B ❍  C ❍  D ❍

Technology Minute

3 Hours of CPE



14. A ❍  B ❍  C ❍  D ❍ 15. A ❍  B ❍  C ❍  D ❍ 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. You can review your state CPA CPE requirements online using links to state boards and state CPA societies.

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Windfalls, IRS Tax Planning and S Corps

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CPA Magazine Tax season 2017