Today’sCPA JULY/AUGUST 2013
T E X AS S O C IET Y OF
C ERT I F I ED P U BL IC AC C OU N TANT S
Auditor Independence: Still Hazy After All These Years! Don’t Count Barcodes Out Yet Married Filing Separately
Also: A Successful Legislative Session
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VOLUME 41, NUMBER 1
William Hornberger, CPA
EXECUTIVE DIRECTOR/CEO John Sharbaugh, CAE
Photographs © Scott Williams, ScottWilliamsPhotography.com.
EDITORIAL BOARD CHAIRMAN Winford Paschall, CPA
Staff MANAGING EDITOR DeLynn Deakins firstname.lastname@example.org 972-687-8550 800-428-0272, ext. 250
TECHNICAL EDITOR C. William Thomas, CPA, Ph.D. Bill_Thomas@baylor.edu
COLUMN EDITORS Greta P. Hicks, CPA Mano Mahadeva, CPA, MBA James F. Reeves, CPA C. William (Bill) Thomas, CPA, Ph.D.
WEB EDITOR Wayne Hardin email@example.com
CONTRIBUTORS Ali Allie, Melinda Bentley; Rosa Castillo; Jerry Cross, CPA; Anne Davis, ABC; Avery Elander; Donna Fritz; Chrissy Jones, AICPA; Rhonda Ledbetter; Craig Nauta; Judy Neathery; Kim Newlin; Catherine Raffetto; Katey Selph
DIRECTOR, MARKETING & COMMUNICATIONS Janet Overton Design/Production/Advertising The Warren Group thewarrengroup.com firstname.lastname@example.org
CLASSIFIED Donna Fritz Texas Society of CPAs 14651 Dallas Parkway, Suite 700 Dallas, Texas 75254-7408 972-687-8501 email@example.com
Editorial Board Arthur Agulnek, CPA-Dallas; Kristan Allen, CPA-Houston; James Danford, CPAFort Worth; Greta Hicks, CPA-Houston; Baria Jaroudi, CPA-Houston; Tony Katz, CPA-Dallas; Jeffrey Liggitt, CPA-Dallas; Mano Mahadeva, CPA-Dallas; Alyssa Martin; CPA-Dallas; Dawne Meijer, CPA-Houston; Winford Paschall, CPA-Fort Worth; Marshall Pitman, CPA-San Antonio; Mattie Porter, CPA-Houston; Kamala Raghavan, CPA-Houston; James Reeves, CPA-Fort Worth; Barbara Scofield, CPA-Permian Basin; Brinn Serbanic, CPA-Central Texas. © 2013, Texas Society of CPAs. The opinions expressed herein are those of the authors and are not necessarily those of the Texas Society of CPAs.
26 Follow the Leader
5 Chairman’s Message
6 Tax Topics
14 Spotlight on CPAs
Hook, Line and Sinker
A Successful Legislative Session
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The Intent of Buybacks
9 Accounting and Auditing
technical articles 30 Auditor Independence: Still Hazy After All These Years!
Doing More with Less: Why CPAs Need to Measure and Report on Sustainability Efforts
12 Emerging Issues Caught in the Crossfire
34 Don’t Count Barcodes Out Yet
36 Married Filing Separately Today’sCPA
17 Take Note
OF TEX AS SO CIET Y
AC C OUNTANT S CERTIFIED PUBLIC
Auditor Independence: Still Hazy After All These Years!
44 CPE Calendar
Don’t Count Barcodes Out Yet Married Filing Separately
See the digital version of
2013-2014 TSCPA Chapter Officers
Today’s CPA (ISSN 00889-4337) is published bimonthly by the Texas Society of Certified Public Accountants; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408. Member subscription rate is $3 per year (included in membership dues); nonmember subscription rate is $28 per year. Single issue rate is $5. Periodical POSTAGE PAID at Dallas, TX and additional mailing offices. POSTMASTER: Send address changes to: Today’s CPA; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408.
What’s New with IRS Audits
8 Business Perspectives
22 Capitol Interest
Serve Well, Lead Well
Also: A Successful Legislative
Today’s CPA online at tscpa.org. 3
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Chairman’s Message By William H. Hornberger, CPA | TSCPA Chairman
Serve Well, Lead Well Editor’s Note: In this first Today’s CPA issue of the Society’s new fiscal year, incoming TSCPA Chairman Willie Hornberger, CPA-Dallas, discusses his plans and goals for the upcoming 2013-14 year. Next issue, Hornberger and TSCPA Executive Director/CEO John Sharbaugh, CAE, will continue to provide a joint Chairman’s and Executive Director’s Message. Accomplishing this requires relationships. I am a big proponent of face-to-face meetings with people: lunches, dinners, gatherings … connecting with people across the state – small towns, big cities. And letting those people across Texas know that TSCPA believes in them, that we want to come alongside and invest with them and
choice of a profession. We have a lot of young people joining us, which means we need to make sure that existing leadership across the state is prepared to lead these new CPAs, to integrate them and get them involved. Down the road, I am particularly excited about a new strategic planning retreat in December. This is our
CPAs are part of the fabric of professional and civic involvement.
The essence of our profession and every CPA is serving people, and I believe passionately that service is at the core of the best leadership. My hope is for all of us to inspire each other to serve our clients and our communities as leaders. Therefore, “Serve Well, Lead Well” will be my motto as 2013-14 TSCPA chairman for the coming year. CPAs are part of the fabric of Texas. CPAs are part of the fabric of professional and civic involvement. One of my key goals is to energize the membership across the state to step up to the plate to build public trust and provide assistance in their communities.
help them serve their clients and their communities well. There’s no substitute for visiting chapters and getting to know as many members as possible. It’s important to be a good listener and find out personally about their needs, concerns and ideas to help them implement their vision in their local areas. I’ve already had the opportunity to visit many areas and witness firsthand the economic miracle that is Texas: Midland/Odessa, Houston, Beaumont, Austin, College Station, and El Paso. I spoke to accounting students from UTPermian Basin and a few months later, from Lamar University. My message to them was that we are fortunate here in Texas, and they are fortunate in their
opportunity to look at how it all fits together. The world is changing rapidly. The accounting profession is changing rapidly. We have an opportunity to look ahead and see what we are going to do to meet the needs of our membership in the long run. That means asking ourselves questions such as: How can we continue to provide the best education possible to our membership? We are one of the biggest providers of CPE to CPAs across the state and that will be one of the critical issues. It’s all about investing in the future, investing in people. It’s about serving them, leading them, and doing both to the best of our abilities. I’m excited to begin the year as your TSCPA chairman. ■
Willie Hornberger can be contacted at email@example.com.
To read more about TSCPA’s incoming 2013-14 Chairman Willie Hornberger, please see the cover article that begins on page 26 of this Today’s CPA issue. Today’sCPA
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Tax Topics By Greta Hicks, CPA | Column Editor
What’s New with IRS Audits IRS Small Business Self Employed (SBSE) field audits and the IRS Large Businesses and International (LB&I) Division have updated their training for employees, especially for their most recent hires. Revenue Agents are asking that all records be submitted electronically, preferably using Excel.
Examples of wording in recent IDRs from Revenue Agents include: • Contributions, Provide in Excel Format: Date, payor, amount of the expense, and detailed description of the charity contributed to. (Actual wording.) • Repairs: Provide in Excel Format: Date, payor, amount of the expense, and detailed description of the nature of the work performed. As to the request for “description,” how does the taxpayer provide this information in Excel without pulling each invoice and typing in the description? Isn’t this the Agent’s responsibility? Rev. Proc. 98-25 states: If “neither the EDI (computer) transactions, nor the accounts payable system, contain product descriptions or vendor names. To satisfy the requirements of §6001, the taxpayer must supplement its EDI records with product code description lists and a vendor master file.” Most systems have a vendor master file list, but does yours have a “product code description list?” Within the LB&I, there are Computer Audit Specialists (CAS) who are Revenue Agents trained in various computer programs and their manipulation. Back in the old days, CAS requested “backup tapes” of records, and they wrote queries to perform analysis of selected trial balance items or the CAS reached an agreement to have access to the taxpayer’s computer system to access pre-agreed upon files.
The CAS responsibility was to support the Revenue Agents by organizing the voluminous amounts of data into a manageable format. Specialists often use sampling, stratification and regression analysis application of data. Recent requests are very different. CAS personnel did not ask for “backup tapes.” They asked that every transaction in the General Ledger System be downloaded electronically in Excel or flat ASCII format. Do you or someone in your company have the skills to convert your current computerized records from your software program into Excel or flat ASCII format? Or, will you have the expense of hiring outside vendors so you can respond to this type of Information Document Request (IDR)? Examples of wording in most recent CAS IDRs include: • Provide a machine sensible file on CDROM or DVD. • Provide General Ledger detail in flat ASCII file with either fixed length fields or if a character delimiter is used, please use the ~ as the field delimiter. • Provide in spreadsheet or flat file or other similar type file. Where does this authority come from and is your company ready for this type of audit? CODE SECTION 6001 AND REGULATIONS Code Section 6001 and accompanying regulations are rather simple, but very broad. For example: Section 6001 provides that “every person liable for any tax imposed by the Code, or for the collection thereof, must keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever necessary, the Secretary may require any person, by notice served upon that person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not that person is liable for tax.” Section 1.6001-1 (a) of the Income Tax Regulations generally provides that persons subject to income tax, or required to file a return of information with respect to income, must keep such books or records, including inventories, that are sufficient to establish the amount of gross income, deductions, credits or other matters required to be shown by that person in any return of such tax or information. Section 1.6001-1 (e) provides that the books or records required by §6001 must be kept available at all times for inspection by authorized Internal Revenue officers or employees, and must be retained so long as the contents thereof
Greta Hicks, CPA, is a consultant on IRS problems, seminar discussion leader, author of continuing education courses and web content provider. She can be reached at firstname.lastname@example.org or www.gretahicks.com.
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may become material in the administration of any internal revenue law.
that created either in the ordinary course of its business or to establish return entries.”
THE DEVIL IS IN THE DETAIL – IRS ADMINISTRATIVE RULINGS If your company has over $10 million in assets, Rev. Rul. 70-15 and Rev. Proc. 98-25 apply. Excerpts follow. Rev. Rul. 71-20, “establishes that all machine-sensible data media used for recording, consolidating and summarizing accounting transactions and records within a taxpayer’s ADP system are records within the meaning of §6001 and §1.60011, and are required to be retained so long as the contents may become material in the administration of any internal revenue law.” Rev. Proc. 98-25 goes further to state, in part: “The taxpayer must provide the Service at the time of an examination with the resources (e.g., appropriate hardware and software, terminal access, computer time, personnel, etc.) that the Revenue Agent determines is necessary to process the taxpayer’s machinesensible books and records.” In addition, it requests that “machine-sensible records be maintained by the taxpayer to meet the requirements of §274 (d) relating to the amount, time, place and business purpose of a business expense…” Except as otherwise required, “a taxpayer is not required to create any machine-sensible record other than
RECORD RETENTION AGREEMENT In addition to the CAS person assisting the Revenue Agent with the audit, CAS performs analysis of the company’s Record Retention Agreement, which is a requirement for all companies with over $10 million in assets. Before a Record Retention Agreement is reached, the CAS person performs an audit of the company’s computer system to determine systems in use, whether the system clearly reflects income, and the taxpayer’s current record retention procedures. If the current system does not meet the requirements of Rev. Rul. 71-20 and Rev. Proc. 98-25, the company must come into compliance by setting up the required record retention system and enter into a Record Retention Agreement with the IRS. Periodically, the CAS will follow up with the taxpayer to insure that the taxpayer is in compliance with their Record Retention Agreement. Note: The records evaluation by a CAS person is not an “examination,” “investigation,” or “inspection” of the books and records within the meaning of §7605 (b) of the Code, or a prior audit for purposes of §530 of the Revenue Act of 1978. Is your company in compliance with Rev. Rul. 71-20 and Rev. Proc. 98-25? ■
For more information about the IRS’ legal authority and long-standing use of electronic records in audits, as well as how the IRS requests and uses electronic files, please see the Journal of Accountancy article, “IRS audits of small business software files” available at www.journalofaccountancy.com/issues/2012/jan/20114540.
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Business Perspectives By Mano Mahadeva, CPA, MBA | Column Editor
The Intent of Buybacks In recent economic history, we’ve never had such low interest rates for so long. And with the present state of the economy, it would hardly be surprising if these rates continued at low levels through next year. When rates were reduced to their present levels four years ago, it was considered temporary; today, they seem to be the new normal! In theory, low rates should provide a boost to capital expenditures, resulting in substantive growth. But we have seen neither as our anemic economy continues to plod its way forward. Forward-thinking companies have seized the opportunity to borrow in the bond markets, locking in cheap financing for years to come. A portion of this cheap money has stimulated share buybacks amounting to more than $400 billion last year and over $200 billion in the first quarter of this year. As examples, Apple made a recent announcement to increase its stock repurchase plan from $10 billion last year to $60 billion over the next three years. Southwest Airlines increased its buyback from $1 billion to $1.5 billion. Merck announced a plan to buy back $15 billion in common stock. Oracle approved an additional $10 billion for share repurchases following buybacks of nearly $6 billion over the prior year. So did a host of other companies that pitched similar initiatives, including Northrup Grumman, Delta Airlines, Exxon Mobil, Cisco, Élan, and United Healthcare. It’s important that investors and stakeholders understand the intent of a buyback by a company. It may be possible that there is no single motive for companies to repurchase their stock. In fact, in any given company, managers may find several reasons encouraging them to buy back their stock. We know that company management is better informed about the company’s true value than outside shareholders and potential investors, where managers have positive news about future profitability, but current
stock prices cannot reflect this, as it would be insider information. As a result, stock prices can be below its intrinsic value. Some companies have taken an approach to clearly state their intent for buying back their shares. Apple’s stated intent is to neutralize the impact of dilution from future employee equity grants and employee stock purchase programs. Berkshire Hathaway said it is using surplus funds to buy back its undervalued stock. General Electric is considering listing its consumer finance operations to fund more share buybacks and strengthen focus on its industrial business. It is also important to consider the strategy of a company buyback. Apple’s case could be considered that of a tax arbitrage. Most of Apple’s cash is overseas. If it truly plans to execute its plan of buying back $60 billion in stock, it would have to borrow money to do so. The interest on debt is deductible, so they pay lower taxes; and at least on paper and based on the rate of borrowing, share prices get a boost. Delta Airlines has a combination strategy to pay dividends and buy back shares amounting to more than $1 billion over the next three years. The Delta approach has flexibility in terms of how the company plans to allocate capital, because it can change its buybacks more easily than it can cut its dividends. Other motives behind buybacks include increasing the float for a company. If the outstanding shares decrease and there is a run on the stock, the company has upward movement due to greater demand. If companies find themselves in an unfriendly takeover position, buybacks
would make the takeover more difficult. By using debt and repurchased stock, a company can immediately alter its debt to equity mix toward a higher proportion of debt. Rather than choose how to distribute money to shareholders, management is using stock purchases as a way to alter its organization’s capital structure. Buybacks do make it easier for companies to boost earnings per share, which makes it an attractive option for executives motivated by share options. But it could signal difficulty for a company to improve margins after the completion of a significant cost cutting initiative or a perceived difficulty to sell its merchandise. Then there are those who suggest it would be better if companies used buyback money in building new factories, equipment and adding more employees. Last but not least, there is the suggestion of “manufactured” earnings. Hopefully, what we see today in buybacks is not a repeat of events of 2007 when companies were buying back their shares at record high prices. Then, when prices fell, they could not afford to buy them even at bargain levels. Prudent investors need to investigate a company’s intent associated with its own buyback and ask the following questions. Is the current price of the stock trading at a discount to its intrinsic value? Are insiders buying shares as well? Is the company buying stock with surplus capital, leaving sufficient funds to take care of operational and liquidity needs of the business? At the very least, answers to these questions should provide a good basis to smart investing. ■
Mano Mahadeva, CPA, is Chief Financial Officer with Solis Health in Addison, Texas. He serves on both the Editorial Board and the Business and Industry Issues Committee for TSCPA. Mahadeva can be reached at firstname.lastname@example.org.
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Accounting and Auditing By John F. Levy, MBA, CPA, Executive Education, Inc., | Guest Columnist
Doing More with Less: Why CPAs Need to Measure and Report on Sustainability Efforts I am not a wild-eyed environmentalist. My idea of communing with nature is 18 holes of golf on meticulously maintained fairways, greens and unfortunately too often roughs, bunkers and hazards. However, I have been thinking about what kind of world we will leave to our children, grandchildren and great grandchildren and what we, as CPAs, can do to preserve and enhance our firms, companies, organizations and world, our only true lasting legacy. Why should CPAs think about sustainability? I believe sustainability efforts will increase company profits by encouraging our organizations to be more efficient; doing more with less. Less waste means not only less pollution, but also less cost. CPAS NEED TO MEASURE AND REPORT CPAs are ideally suited to measure sustainability efforts because we collect and analyze our organizations’ information. CPAs should lead efforts to report on sustainability because we have the experience and knowledge to create clear, concise and informative documents. WHAT IS SUSTAINABILITY? Sustainability means different things to different people. One major impediment to engaging organizations in serious sustainability discussions is a lack of a common vocabulary. A CEO may hear a proposal to spend money appeasing “treehuggers,” while her CFO may really be proposing an initiative to reduce wasteful spending. A commonly accepted definition of sustainability comes from a 1987 report by the World Commission on Environment and Development (WCED). The United Nations convened the WCED to address growing concerns about the accelerating deterioration of the human environment and natural resources. The report, commonly referred to as the Brundtland Report, defines sustainable
development as: development that meets the needs of the present without compromising the ability of future generations to meet their own needs. DOING MORE WITH LESS Successful companies in the 21st century will be more efficient. Companies responded to the 2008 global recession with dramatic workforce reductions and ruthless cost cutting. In a resource-constrained world, efficient use of all resources is mandatory. More efficient business processes result in fewer resources used, including energy, water and raw materials. More efficient resource usage also results in less waste, including air and water pollution and solid waste. Howard Brown, founder of dMASS, a consulting firm dedicated to reducing waste, often says that nothing goes out the back end that did not come in the front end. Companies first purchase the contaminants and pollutants they emit and their inefficient use not only costs society, it costs the company. Reducing waste and pollutants not only benefits the environment, it also financially benefits the organization. Forward-thinking businesses are now reducing all wastes, even non-toxic or nonpolluting waste. Current waste reduction efforts include reducing excess materials, reusing materials if possible, and recycling non-reusable materials. While these efforts are laudable, they will not lead to truly sustainable prosperity for an individual business nor society as a whole. In
particular, while recycling is important, it is only part of the solution to environmental or resource problems. Improper or inefficient recycling can be energy intensive, expensive and might even create more waste. Accepting the idea that your product is mostly waste might not be easy at first. After all, you have customers who buy your product. Customers are not really paying you money because they love your product. They want the benefits they get from using your product. If they can get those benefits more cheaply, with less environmental impact, and with some cool but completely new delivery method, they will do it. So where is this drive for efficiency headed? Eventually, someone will find a way to deliver the same benefits that existing products do, but with much less resource mass and energy usage. They will be able to serve customers in a more sustainable manner for less money. Your company is at risk from gamechanging innovations from a fast moving competitor or a start-up not even on your industry’s radar screen. The way to avoid a crisis then is to start now down the path of doing more with less. MEASURING SUSTAINABLE PRACTICES Shareholders, board members and senior management may understand that sustainability is “good,” and they may even continued on next page
John F. Levy, MBA, CPA, is the CEO of Board Advisory, a consulting firm that assists public companies, or companies aspiring to be public, with corporate governance, compliance, financial reporting and financial strategies. He has served as CFO of both public and private companies. Levy currently serves on the board of directors of three public companies, including as chairman of one company and lead director of another. He is the author of several seminars and popular discussion leader for Executive Education, Inc.
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DOING MORE WITH LESS continued from previous page
believe that it is “good business.” However, until we adequately measure and quantify the return on sustainable investments in terms of time and money, many businesses will not fully embrace sustainability efforts. Accounting for externalities may be the greatest sustainability accounting challenge. An externality is the benefit or cost to third parties of an organization’s action, but not accounted for by the organization. Externalities can be positive or negative. For example, a famous chef opening a new restaurant in a troubled neighborhood may create a halo effect, attracting more restaurants, art galleries and theaters to the neighborhood. The additional evening traffic reduces crime by having more people on the streets. Lower crime and attracting new hip businesses increases the neighborhood’s desirability for both residents and businesses, increasing property values. Property owners, both commercial and residential, benefit from a positive externality created by the chef and her restaurant. Most sustainability discussions focus on negative externalities. Instances of air and water pollution are externalities that at one time had no cost. Legislation mandating limits on air and water emissions and imposing fines and penalties transformed these externalities into expenses. Much of sustainability accounting attempts to measure and quantify other externalities, such as greenhouse gas emission, labor abuses, or excess water or energy usage.
Traditional business theory assumes that as production increases, per unit cost goes down. Negative externalities (waste, pollution, labor abuses, etc.) increase as production increases, so the old theories about cost reductions from mass production may need reconsideration. INTERNAL REPORTING Goals, objectives and users’ needs should guide internal sustainability reporting. Reports need to be timely, consistent and actionable. As the information keeper, an accounting department wields great power in sustainability efforts. However, simply having information provides no value to the organization. Collect and disseminate information on a regularly scheduled basis. We have the responsibility to report all information – good and bad. Provide bad news on sustainability efforts quickly to those who can act on it. Unless the information has significant financial implications, distribution to others can be slower and follow appropriate review and consideration of ameliorating actions. Verify good news, but get it out to everyone quickly. Even small wins in the beginning stages of a sustainability effort are energizing. EXTERNAL REPORTING According to the Global Reporting Initiative (GRI), an international nonprofit organization encouraging sustainability reporting and providing reporting guidance, 95 percent of the 250 largest companies in the world reported on corporate responsibility (sustainability) activities. Reporting on your organization’s
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sustainability efforts requires you to answer two questions: • Why are you reporting? • Who are your intended readers?
Most preparers provide reports because they want to improve processes, describe achievements and communicate with stakeholders. Report types vary considerably; however, GRI guidelines are providing more uniformity. Determine your report’s primary users at the onset. If your goal is to meet a supplier’s mandated performance level, your report will conform to their requirements. If you believe your sustainability efforts will provide a positive differentiator with consumers, your reports should be attractive, easy to understand and generally userfriendly. Initial reports do not need to be complex or comprehensive. Determine what you want to include in a report. Sustainability efforts are multi-faceted and no requirement exists to report all efforts. Reporting only successes leaves no room for improvement. Readers may understand the difficulty of many of your goals and appreciate measuring effort as much as measuring results. Determining what to include ultimately comes down to what your readers care about. Reports must be verifiable. Some companies provide third-party assurances on their sustainability reports, and more large companies now consider using large accounting firms or other consultants to give their reports credibility. Requirements for “audits” similar to public company financial statement audits are a long way off and will probably never be required, but prepare auditable disclosures.
YOUR CONTINUED EXISTENCE Sustainability means many things to many different people, but at its core sustainability means building a lasting organization as part of a lasting planet. Sustainability is about long-term thinking. Sustainability also means doing more with less. In an ever more resource-constrained world, doing more with less will not only save money, it will help ensure your organization’s continued existence. No sustainability effort succeeds without measuring progress. While measuring some sustainability efforts is hard, without objective and verifiable information, progress is impossible. Information is useless unless others have it and can act on it. Internal reporting on sustainability is necessary, and external reporting is becoming more commonplace. Think about why you want to communicate, what you want to communicate, to whom you want to communicate, and how you want to communicate. Finally, we need the conviction and courage to get our sustainability ACT together. • Awareness that sustainability is required, and opportunities to create and improve our organization’s sustainability efforts are all around us. • Commitment to building a lasting organization as part of a lasting world. • Transparency in everything we do, measure and report.
We all have the opportunity to make a difference. Our actions today will define not only our tomorrows, but also our children’s, grandchildren’s and all future generations.
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Emerging Issues By James F. Reeves, CPA | Column Editor
Caught in the Crossfire As employers and employees approach the annual enrollment period for their 2014 employee benefit plans over the next few months, many are no doubt grappling with the nuances and impact of the Affordable Care Act (ACA). Depending on whom you listen to, which newspapers you read and which TV stations you watch, implementation of the ACA will be: a) A complete disaster that places the entire health care system at risk; b) A bumpy and perhaps messy ride that will eventually smooth out into a new normal; or c) Under control as dedicated civil servants work tirelessly behind the scenes to get regulations finalized, mechanisms and infrastructure in place, and citizenry educated.
Notwithstanding the fact that news reports with increasing frequency are using terms like catastrophic, overwhelming, mind-boggling complexity, and high anxiety to describe the ACA’s implementation, let’s go with choice b) above for the sake of conversation, and let it go at that. Things just may not be going as smoothly as some had expected. Take for example the health insurance exchanges. Reportedly, 17 states will be operating their own exchanges, seven are partnering with the feds to operate exchanges, and 26 have opted out, leaving their residents to use the federal exchange by default. For these exchanges to work properly (as I understand it), they will have to integrate data from an individual’s 1040 with insurance offerings available on the applicable exchange and with employer data, while simultaneously testing for Medicaid eligibility, citizenship and residency. And they will have to provide a user experience that will keep users engaged (i.e., in the manner to which they have become accustomed via other Internet experiences) until the applicable transactions are completed. Many of us have experienced messy systems conversions and understand how painful they can be, but nobody has experienced one on this order of magnitude. Another big unknown is the effect of ACA implementation on health care costs in general, and insurance premiums in particular. The key to keeping premiums down is enrollment, and specifically enrollment of young, healthy individuals, which will drive down premium costs and offset the pressure on prices that will result from enrolling older uninsured people, individuals who move from the employer market to the individual market for whatever reason, and those currently in high-risk pools. Insurance companies are concerned that young, healthy people will simply ignore the individual mandate to purchase insurance or get so frustrated with the process that they opt to pay a penalty with their tax returns instead. It will be interesting to see if the Obama
administration can harness its much ballyhooed social media and data mining prowess to get the word out and convince young, healthy Americans to purchase insurance. It may be an uphill battle. According to New York Times columnist Frank Bruni, 40 percent of Americans don’t even know the ACA is a law on the books. ACA 101 FOR CPAS – NOW IS THE TIME! No question, the ACA is a political hot potato. The Obama administration and its supporters are anxious to see it succeed. Republicans would like to repeal the ACA, in its totality or at least in part, and have been somewhat successful in limiting funding, for example funds that HHS has requested to enhance public awareness. CPAs are caught in the crossfire and will also find themselves caught on the front lines, as much of the ACA will be administered through the Internal Revenue Code (IRC) and by the Internal Revenue Service (IRS). In fact, the IRS Inspector General calls the ACA “the largest set of tax law changes the IRS has had to implement in more than 20 years.” While the ACA’s 3.8 percent net investment income tax and the 0.9 percent additional Medicare tax that take effect this year are generally understood as traditional tax concepts (albeit not without their own complexities), many provisions of the ACA are unlike anything CPAs have traditionally had to deal with. And while many CPAs have an inkling of what lies ahead as a result of ACA provisions taking effect in 2014, most have not proactively studied the fine print or embraced the opportunities that await those who are able to provide guidance that many businesses will need. In general, business owners are aware of the penalties for noncompliance with ACA requirements and most are counting on their CPAs and other employee benefits advisors for advice concerning exposure to the penalties and potential ways to avoid or reduce them. And unlike many tax provisions that impact CPAs primarily via after-the-fact tax return reporting, many of the provisions of the ACA must be addressed proactively; i.e., before the tax year begins, to avoid being in damage-control mode later. Following are the more widely applicable tax concepts in the ACA that would be well worth studying: • Minimum Value – whether an employer plan provides certain minimum standards of health insurance coverage to the
James F. Reeves, CPA, is Senior Vice President, New Product Development at the Tax and Accounting business of Thomson Reuters. Contact him at email@example.com, or visit his blog at http://jamesfreeves.blogspot.com.
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employee will be relevant to the employee’s eligibility for the premium tax credit and application of the employer shared responsibility (aka play or pay) penalty; Small Business Health Care Tax Credit – a credit already in effect that helps small businesses and tax exempt organizations afford to cover their employees, specifically low and moderate income workers, and is available to eligible employers that pay at least half the cost of single coverage for their employees; New rules about contributions to Flexible Spending Accounts, Health Savings Accounts, and Archer Medical Savings Accounts that employers and employees need to consider when making health benefit decisions; Health Insurance Premium Tax Credit (aka Sec. 36B credit) – a new refundable tax credit to help individuals purchase health insurance through an exchange. Sounds simple enough, but wait until you see the online application … the complexity is mind-numbing. The original draft of the online application was 21 pages (61 pages with all the drill-down questions opened). After much negative press, the form was reduced to three pages for individual applicants and 11 pages for a family, using smaller type size, less space for answers, and instructions to add copies of filled-in pages for children, among other things. Applicants must sign under penalties of perjury, with a warning on the signature page that information submitted will be cross-checked against databases from the IRS, Social Security, Department of Homeland Security, and/or consumer reporting agencies. And there are recapture provisions requiring individuals to repay the subsidies if their income turns out to be more than anticipated. Good luck in advance with this one! Individual Shared Responsibility Mandate – the subject of the Supreme Court case, a requirement for each individual to either have minimum essential health coverage or pay a “shared responsibility payment” (aka penalty) with Form 1040. Regulations have been proposed by both Treasury/IRS and HHS. Individuals for which health insurance is unaffordable are exempt, but affordability for this provision is different from affordability under the employer mandate (below). Nondiscrimination requirements for group health plans – a
reversal of previous policy that allowed fully insured health plans to discriminate as to eligibility, contributions, benefits, etc. without adverse tax consequences. Under the ACA, fully insured health plans generally must meet the requirements of IRC Sec. 105(h)(2) that the plan be nondiscriminatory with regard to eligibility and benefits. Plans that discriminate in favor of highly compensated employees will be subject to stiff penalties. • Employer Shared Responsibility Mandate – the soon-to-beinfamous “play or pay” rules. Generally, large employers, those with at least 50 full-time employees, must either “play” – offer “minimum essential insurance coverage” to all full-time employees and their dependents – or “pay” penalties. Some employers may opt to pay the penalties, perhaps adjusting employee compensation in the process. The tax advisor may be called on to determine large employer status (in light of part-time, seasonal and variable-hour employees and contractors); calculate potential penalties; determine additional premiums necessary to avoid the penalties; assess the impact of converting from a deductible insurance premium scenario to a nondeductible penalty scenario; ensure employee premiums are low enough (i.e., affordable); determine whether any health care reimbursement plan from prior years is still allowable in 2014; and calculate recapture of the premium tax credit.
NEXT STEPS – THE CLOUDY CRYSTAL BALL Whether the implementation of the ACA is a complete disaster, a speed bump en route to the new normal or smooth sailing, CPAs will be on the front lines and should be part of the national conversation. How smoothly the implementation goes over the next 15-16 months will likely impact the 2014 Congressional midterm elections and how the ACA evolves. If the ride gets too bumpy, we may well see legislative changes to the ACA such as those proposed in an article titled “Repeal and Replace: 10 Necessary Changes” by the National Center for Policy Analysis, a conservative-leaning think tank based in Dallas (www.ncpa.org), some of which make a whole lot of sense. ■
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Spotlight on CPAs By Anne McDonald Davis, ABC
Hook, Line and Sinker
Active Volunteer Finds Fulfilling Life in the Rio Grande Valley
Ben Pena, CPA, says that life in the Rio Grande Valley is a little slower-paced than in big cities like Dallas or Houston. Less traffic, close-knit communities. Fishing for sharks on the beach in South Padre. Wait … what was that last one? That’s right, one of Pena’s hobbies is paddling offshore in a kayak, dropping weighted bait into the ocean and then paddling (quickly, one would think) back to shore and fishing for sharks right there on the beach. Has this man never heard of sandcastles or sunbathing? “Well, you use a bigger than usual fishing rod!” exclaims Pena, as if that explains the whole thing. 14
“You kayak out there, sometimes 500 or 600 yards, and it’s amazing. So peaceful and quiet … you don’t even hear the noise of the crashing waves. Then you kayak back in and wait. Sometimes you get a bite and sometimes you don’t. When you do get a bite, it’s very interesting.” I’ll bet it is. Perhaps Pena’s rather casual lack of apprehension about the local wildlife can be at least partially attributed to having lived most all his life in the area. Born in Weslaco, attending school there and going on to college in Edinburg at what is now UT-Pan American, he’s a hometown kind of guy. And despite his fourth-grade teacher assuring his mother that math
would never be his “strong point,” Pena is a hometown kind of CPA. But Pena didn’t become a CPA as quickly as he might have preferred. Pena recalls: “In addition to student loans, I was working my way though college for a small software development company that did programming and database management; I think that was a blessing and a hindrance at the same time. The training that I got in database management was essential for me making it in the accounting world once I got out of college, but working full-time, I could only take one or two classes at a time. One day, I had a conversation with my boss and he was the one who actually gave me the advice to quit, to just take a risk and go back to school full-time and get it done. And so that’s what I did. I was able to get the equivalent of three years’ worth of college in two, including summers. I graduated from high school in 1989 and college in 1996! So when I finally did get my degree, it was a really, really good feeling.” Even before graduating, Pena interviewed with Burton, McCumber and Cortez, where he has spent his career. Because of how his background in information technology dovetailed with the needs of their banking clients, Pena was able to move up quickly in the firm. He smiles: “They let me become a star, if you will, and have been very good to me, mentored me. My boss, Richard Burton, a senior partner would tell me, ‘We want you here for the long run. One of these days, this firm is going to be yours; you’re going to be part of it. I really believe that you can do that!’ All these years later, I’m still here.” So Pena feels strongly about returning the favor to the next generation, encouraging young people to consider accounting and, if they do, become CPAs, and become active in their professional society. Most of all, he says that students need to “learn to learn.” He explains: “The first piece of advice I would give to any student, not just an accounting student, is that they need Today’sCPA
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to learn their way of learning, how they learn most quickly and efficiently. Once you discover that you can master a subject, math for instance, it actually becomes fun. My second piece of advice is to read. It exercises your mind and it’s the foundation to learning. I don’t think the accounting profession is as much about numbers as language and comprehension. We read accounting principles and auditing standards. It’s all literature if you think about it.” As a career-long auditor, Pena would like to become more involved in closing the expectation gap with the public. He ponders: “Something goes wrong with a company, one of the first questions people ask is, well, where were the auditors and how come the auditors didn’t catch this? The auditing profession is changing … we need to make sure our auditors get the proper training and supervision. We have to ask: do we have a duty and obligation to meet those kinds of public expectations and if we do, how do we get there? Some of it is new territory, but I think we can always do better. I intend to be part of that process. Going forward, I want us to make sure that we’re doing what we’re
supposed to and protect the public. “Just from a personal growth standpoint, I’m thinking that I want to be a better leader. I want to be a better person who makes a difference in my profession and in my community.” Accordingly, Pena is active in the leadership of his local TSCPA chapter, the state Society, and with his community. He has served as chair of the Leadership McAllen program and with Gideon’s International. He combines his love of running marathons with participating in charity events, such as Team-In-Training Leukemia and Lymphoma Society runs. Pena adds: “And I have my beautiful wife, Sonia; we’ve been married 14 years and have three children. Ben is about to turn 11, Leo is nine and my little girl, Gracie, is three. I’ve been blessed with a happy family – you know, the most important things in my life are God and my family.” The mild-mannered CPA points out that he also enjoys “fishing in general,” not just for sharks, although he says more people seem to gather around and watch when he pulls a shark out of the surf. Well, yeah! ■
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| JULY/AUGUST 2013
Chapters By Rhonda Ledbetter | TSCPA Chapter Relations Representative
2013-2014 TSCPA Chapter Officers ABILENE CHAPTER
Lori E. Herrick, President Robert R. Womack, President-elect Michelle A. Beaty, Vice President Gerald A. Reid, Secretary/Treasurer
Michele M. Heyman, President Matthew G. Malcom, President-elect Katy Avenson, Vice President Julie A. Dale, Vice President Kara Hamann, Vice President Kristy K. Holmes-Hetzel, Secretary/ Treasurer Olivia Espinoza-Riley, Secretary/ Treasurer-elect
BRAZOS VALLEY CHAPTER
Rodney J. Horrell, President James M. Larkin, President-elect Amy N. Restivo, Secretary Jennifer M. Fox, Treasurer
CENTRAL TEXAS CHAPTER
Sally W. Wolfe, President Shelly R. Spinks, President-elect Teri Lynn H. Meyers, Vice President Angela M. Ragan, Secretary Nancy G. Miller, Treasurer
CORPUS CHRISTI CHAPTER
Paul A. Damerow, President Amy W. Twardowski, President-elect Anita Cadena, Vice President Johnna L. Jones, Secretary/Treasurer
John N. Perkins, Chair Terri M. Hornberger, Chair-elect Bryan E. Sweeney, Treasurer Jeffrey P. Weyandt, Treasurer-elect
EAST TEXAS CHAPTER
Gina G. DeHoyos, President Randy L. Turner, President-elect Michael S. Thomas, Vice President Kelly K. Marsh, Vice President Rose M. Blakely, Secretary/Treasurer
EL PASO CHAPTER
Teri A. Reinert, President Sean M. Ihorn, President-elect James M. Caylor, Vice President Jennifer Hennessey, Vice President Joe F. Hernando, Vice President Jonathan W. Lucas, Secretary Belen D. Briones, Treasurer
FORT WORTH CHAPTER
Robin T. Christian, President Steven G. Newcom, President-elect Kelly R. Hein Jr., Vice President Adam M. Lawyer, Vice President Jeremy C. Sweek, Vice President Susan I. Adams, Secretary/Vice President Amanda F. Johnson, Treasurer Raymond H. Best, Treasurer-elect
Thomas J. DeGeorgio, President Carol G. Warley, President-elect Paul A. Vanek, Vice President J. Ramsey Womack III, Secretary Gerrad Heep, Treasurer Sheila A. Enriquez, Treasurer-elect
Anne M. Carpenter, President Alicia M. Pickens, President-elect Selena R. Fogg, Vice President Tomi D. Kerns, Secretary Stephanie M. Fitzgerald, Treasurer
PERMIAN BASIN CHAPTER
Ryan G. Bartholomee, President Jimmy Hudson, President-elect Aaron Estrella, Vice President Teresa G. Nunley, Vice President Valarie N. Sanchez, Secretary/Treasurer
RIO GRANDE VALLEY CHAPTER Carol B. Collinsworth, President Jose A. Garcia Jr., President-elect Maria G. Elizondo, Vice President Bill Ruppert, Secretary David Garza, Treasurer
SAN ANGELO CHAPTER
Emily A. Knopp, President Travis L. Garmon, President-elect Patti B. May, Secretary Curtis A. Holtman, Treasurer
SAN ANTONIO CHAPTER
Lynn S. Kupper, President Martha C. Perez, President-elect Keni L. Rodgers, Vice President Priscilla A. Soto, Vice President Stewart A. Wedge, Vice President Joe M. Guerra, Secretary Mark J. Goldman, Treasurer Charles T. Clark, Treasurer-elect
SOUTH PLAINS CHAPTER
Jeffrey L. Marshall, President Linda C. Turnbough, President-elect Gregory L. Freeman, Vice President Teresa G. Green, Secretary/Treasurer
SOUTHEAST TEXAS CHAPTER
Laura J. Williams, President Kristin A. Mattingly, President-elect Robert L. Bynum, Vice President Julia Hayes, Vice President Jennifer M. Turner, Secretary Wendi C. Taber, Treasurer
Jay T. Hoy, President Jay T. Hoy, President-elect Mark R. Van Herpen, Vice-President Kristin L. Peeples, Secretary/Treasurer
Brenda K. Roth, President Diane R. Kliem, President-elect Billy H. Nguyen, President-elect Nominee Joshua K. Page, Secretary/Treasurer
WICHITA FALLS CHAPTER
Timothy W. Norden, President Mark A. Anderson, President-elect James K. Rowland, Vice President Shannon D. Adams, Secretary Monty Walker, Treasurer
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TSCPA Recognizes 2013 Rising Stars TSCPA recognized 18 up-and-comers as 2013 Rising Stars honorees. The honorees were selected by a TSCPA task force based on their contributions to the accounting profession and their communities. The 2013 Rising Stars include: Ryan M. Gibson, CPAAbilene; Julie A. Dale, CPA-Austin; Kara Hamann, CPA-Austin; Brian Mueller, CPAAustin; Clayton A. Ripley, CPA-Austin; Shelly R. Spinks, CPA-Central Texas; Amy W. Twardowski, CPA-Corpus Christi; Adria R. Velasquez, CPA-Corpus Christi; Christopher S. Gummer, CPA-Dallas; Lucas LaChance, CPA-Dallas; Kimberly A. Lyons, CPA-Dallas; Cynthia Morales, CPA-Dallas; Mark A. Collado, CPA-Houston; Guadalupe R. Garcia, CPA-Houston; C. Aaron LeMay, CPA-Houston; William J. Kelley, Jr., CPA-Permian Basin; Melanie C. Geist, CPA-San Antonio; and Marc D. Sewell, CPA-San Antonio. They will be featured in the September/October issue of Today’s CPA.
What’s New On the TSCPA Website Go to tscpa.org to learn more about … TSCPA’s incoming 2013-2014 Chairman William Hornberger, CPADallas, is highlighted. Please see “Meet TSCPA Chairman William Hornberger” on the left side of the home page. Today’s CPA magazine is online. You can access the magazine from the home page on tscpa.org. The link is on the right-hand side of the home page just below News Alerts and the CPE Catalog. Today’s CPA is posted in a digital format, as well as .PDF files that can be downloaded.
The following people have had their membership in TSCPA expelled by the Executive Board under TSCPA Bylaws Article III, Section (4B). This action was a result of the revocation of their CPA certificate by the Texas State Board of Public Accountancy. • Yvonne Cypert, Waco; • Scott David Eller, Mansfield; • Jack S. Huffman, San Antonio; • John T. Newman, San Antonio; • John H. Richardson, San Antonio.
As a result of a decision by the Executive Board of the Texas Society of CPAs, the following member has had her TSCPA membership: Suspended – • Cheryl Ann Box of Cotulla effective May 30, 2013. The action was based on a three-year suspension of Box’s certificate by the Texas State Board of Public Accountancy effective Jan. 17, 2013. The State Board’s findings were that she failed to represent a client in a matter before the Internal Revenue Service, did not respond to the client’s requests for information, and failed to respond to State Board communications.
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Renewing Your Membership If you haven’t already renewed your TSCPA membership, be sure to renew now! TSCPA dues notices were sent out in April and paper statements were sent to members who had not yet renewed their dues by the end of May. You can access and update your records and pay your dues online at tscpa. org; don’t forget to consider our affiliate contributions, if applicable. If you have a question regarding your member dues, please contact Member Services at 800-428-0272, ext. 260. TSCPA looks forward to continuing to serve you.
New Video for TSCPA’s ACAN Program
The TSCPA Accountants Confidential Assistance Network (ACAN) program is dedicated to helping Texas CPAs, CPA candidates and accounting students who may need assistance with alcohol, chemical dependency or mental health issues. The program provides a 24-hour hotline at 1-866-766-ACAN or you can also contact Craig Nauta at cnauta@tscpa. net. TSCPA created a new video about ACAN. It reminds those dealing with these issues that “You are not alone.” The video is available in the ACAN area of TSCPA’s website. To view it there, go to the website at tscpa.org, select Resource Center, and then scroll down and click on Accountants Confidential Assistance Network. 17
Take Note Sixth Annual Young CPAs and Emerging Professionals Conference The Young CPAs and Emerging Professionals Committee held its sixth annual Young CPAs Conference in Houston on June 14. With a very successful turnout of students, candidates and CPAs from all over Texas, attendees listened to sessions on leadership, financial reporting, fraud, team building and more. Some of the most popular sessions of the day were the practice development panel discussions, made up of young CPAs serving on the panels. There were two panel discussions that catered to two different groups of attendees. Young CPAs and Emerging Professionals Committee member Ryan Johnston, Corpus Christi, moderated a panel consisting of Ryan Reneau, CPAHouston, Kristan Crapps, CPA-Houston, Diana Castro, CPAHouston and Holly Zhang. The panel members discussed their careers in public practice and industry. Some of the panelists have switched from public practice to industry and vice versa; they shared their insight on switching, as well. Committee member Katy Avenson, CPA-Austin, moderated the other discussion. The panel included Ben Simiskey, CPAHouston, Andrew Barbe, CPA-Houston, Danielle Supis Cheek, CPA, and Amanda Graves, CPA. They discussed the various career opportunities available to CPAs. The panel shared insight on their particular industries, such as oil and gas, audit, internal firm services and financial planning. The conference closed with TSCPA Chairman Willie Hornberger, CPA-Dallas, discussing the abundance of opportunities available to Texas CPAs, as well as the benefits of getting involved with TSCPA and local chapters. The committee plans to meet later this summer to begin planning for next yearâ€™s conference and other initiatives for engaging and involving the young CPA members in the Society year-round.
TSCPA Chairman Willie Hornberger discusses opportunities in accounting around the state of Texas at the Young CPAs and Emerging Professionals Conference.
Young CPAs and Emerging Professionals Committee member Ryan Johnston, Corpus Christi, moderated a panel discussion with CPAs who discussed their careers in public practice and industry. (L-R Ryan Johnston-Corpus Christi, Kristan Crapps, CPA-Houston, Ryan Reneau, CPA-Houston, Diana Castro, CPA-Houston and Holly Zhang).
The audience listens to a panel of young CPAs discuss their unique accounting careers (L-R Andrew Barbe, CPA-Houston, Danielle Supis Cheek, CPA, Amanda Graves, CPA, Ben Simiskey, CPA-Houston, moderator Katy Avenson, CPA-Austin).
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2014-2015 Leadership Nominations The nominations process is one of the most important activities affecting TSCPA Position Statement on Campaigning: Organized the success and future of the Texas Society of CPAs. Your input is vital! I letterwriting campaigns and/or other methods of urge you to complete this form and return it by August 1, 2013. electioneering are NOT encouraged. Communiques from the general membership should not be sent to The Nominations Committee members are: Sandra Kay F. Brown, Vice individual members of the Nominations Committee, Chair, Lorena Castillo, Chris Busch, Michael Brown, Susie Sullivan, but rather to the chairman of the Nominations Michele Heyman, Alyssa Martin, Steve Newcom, Brian Jones, Lynn Committee, in care of the TSCPA office in Dallas. Kupper and Jeff Gregg. They are not eligible for consideration for any positions for which they are nominating.
Please send your completed form to: Nominating Committee, TSCPA; 14651 Dallas Parkway, Suite 700, Dallas, TX 75254-7408; Attention: Ali Allie, Staff Liaison; or by e-mail at email@example.com; or by fax: 972-687-8602.
Fred J. Timmons, Nominations Committee Chair
2011-2012 Fred J. Timmons
San Antonio 2012-13 Chairman
2011-2012 Stephen G. Parker
Houston 2012-2013 Treasurer
2011-2012 Dora J. Dyson Central Texas
2012-2013 William H. Hornberger Dallas 2013-14 Chairman
2012-2013 Jeannette P. Smith
Rio Grande Valley 2013-2014 Treasurer
2012-2013 Brenda R. (Roxie) Samaniego El Paso
2013-2014 Mark D. Lee
Houston 2014-15 Chairman
2013-2014 James R. Oliver, Jr.
San Antonio 2014-2015 Treasurer
2013-2014 Susan S. Roberts Fort Worth
Fill in nominations below: 2014-2015
_______________________ (2015-2016 Chairman) ______________________ (2015-2016 Treasurer) ______________________ (2014-2015 Secretary)
Executive Board Members
Includes six Executive Board members for staggered terms. Four current members have unexpired terms. Two members for three-year terms will be selected by the Nominations Committee. Three members will be appointed by Chairman-elect Mark Lee for a one-year term, 2014-2015. The TSCPA Executive Director/CEO also serves as an Executive Board member.
James R. Oliver
Lei D. Testa
Kathryn W. Kapka
(Three-year term ending 2012-13)
(Three-year term ending 2013-14)
(Three-year term ending 2014-15)
Mark D. Lee
(Three-year term ending 2012-13)
(Three-year term ending 2013-14)
Michael L. Brown
(Three-year term ending 2014-15)
Jesse Dominguez, Jr.
Michael L. Brown
(Three-year term ending 2013-14)
(Three-year term ending 2014-15)
(Three-year term ending 2015-16)
Lei D. Testa
Kathryn W. Kapka
Jerry D. Spence
(Three-year term ending 2013-14)
(Three-year term ending 2014-15)
(Three-year term ending 2015-16)
Charlotte M. Jungen
Jacquelyn E. Kuciemba
Kirby H. Jackson, Jr.
Michael W. Young
Joan E. Schwartz
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Brazos Valley Panhandle
_______________________ (Three-year term ending 2016-2017)
_______________________ (Three-year term ending 2016-2017)
Ryan G. Bartholomee
Kathryn W. Kapka East Texas
Fill in nominations below:
2011-2012 Appointed Charlotte M. Jungen
Jesse Dominguez, Jr.
2014-2015 Leadership Nominations Directors-At-Large Terms Expiring 2014
Terms Expiring 2015
Terms Expiring 2016
John E. Baines
E. Leroy Bolt
Allyson B. Baumeister
Bradley D. Brown
C. Wayne Barton
Nancy E. Foss
Sandra Kay F. Brown
Thania D. Gonzalez
Sidney P. Glandon
Russell J. Chimeno
Ruth S. Gonzalez
Toni McBee Joyner
Charlotte M. Jungen
Kerry B. Lore
Donna P. Tadlock
Kelly J. Parr
Donna H. Hugly
Carol S. McIntosh
James F. Reeves
Marshall K. Pitman
Cameron M. Talbert III
Jerome G. Kotzur
Joan E. Schwartz
Oran J. Tsakopulos, Jr.
William L. Patton
Tracy B. Stewart
Michael W. Young
Ryan G. Bartholomee
Michael W. Young
Fort Worth Austin
Rio Grande Valley El Paso
Wichita Falls Houston
Central Texas San Antonio Panhandle
Southeast Texas Brazos Valley
Southeast Texas Brazos Valley
Central Texas Dallas
_______________________ _______________________ _______________________
(Terms expiring 2017)
Rio Grande Valley
Fill in nominations below:
_______________________ _______________________ _______________________
Brazos Valley Panhandle
Nominations Committee Member (Terms expiring 2015)
Members of the Committee on Nominations shall have been members of the Society for at least five years and may not serve two succeeding years. Terms Expiring 2013 Donna H. Wesling, Chair Austin Melanie C. Geist, Vice Chair San Antonio Jacquelyn E. Kuciemba Brazos Valley Sheri K. DelMage Southeast Texas Michelle R. Downs Central Texas Robert G. Lindsey East Texas
Aaron G. Draper Austin Nancy M. Mathews Houston Paul W. Willey Dallas Robin T. Christian Fort Worth Randy L. Crews Rio Grande Valley Larry D. Edgerton Permian Basin
Terms Expiring 2014 Fred J. Timmons, Chair San Antonio Sandra Kay F. Brown, Vice Chair Brazos Valley Chris W. Busch Southeast Texas Michael L. Brown Central Texas Lorena Castillo Rio Grande Valley Michele M. Heyman Austin
Alyssa G. Martin Dallas Steven G. Newcom Fort Worth Brian C. Jones Houston Lynn S. Kupper San Antonio Susie Sullivan Corpus Christi C. Jeff Gregg Wichita Falls
Fill in nomination below: (One-year term)
Ten members represent Texas. Three-year terms plus one one-year designee. The current TSCPA chairman-elect automatically fills the one-year designee vacancy, and the current TSCPA chairman automatically fills one of the three-year vacancies for AICPA Council.
Terms Expiring 2013
Terms Expiring 2014
Terms Expiring 2015
Patrick L. Durio
James F. Reeves
Jerry L. Love
Carol A. Cantrell
Nancy Carefoot Fort Worth
William L. Reeb Austin (Board Member)
Fred J. Timmons
San Antonio (One-year designee)
C. Jeff Gregg Fort Worth Houston
Jean M. Hobby
William H. Hornberger Dallas (One-year designee)
Donna H. Wesling Tracy B. Stewart Brazos Valley
James A. Smith Dallas
Fill in nominations below: (Terms expiring 2017)
Terms Expiring 2016 Fred J. Timmons San Antonio Stephen G. Parker Houston E. Leroy Bolt Abilene Dora J. Dyson Central Texas
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By Barry Payne, Director for Business Development, AICPA
CGMA at Work: Employer Voices Editor’s Note: In this article, Barry Payne, Director for Business Development at AICPA, discusses the work AICPA is doing to raise the profile and value of management accountants in the eyes of their current and future employers. Payne learns about what leaders of finance teams need to succeed and visits with those same leaders to help them understand how the CGMA designation helps them develop their finance teams.
Since we launched the Chartered Global Management Accountant designation early last year, our goal has been to elevate management accounting. To me, that means raising the profile and value of management accountants in the eyes of their current, and future, employers. By recognizing and highlighting the strategic contributions that CPAs working in business and industry make every day, we can make their value known – and understood – in the marketplace. Specifically for AMEX’s employees in finance roles, the events were designed to provide attendees with useful information to encourage them to pursue learning and development opportunities. We set up a booth stacked with CGMA reports and information packets, and over the course of the two days, spoke with hundreds of employees and hiring managers at various stages of their careers. I’d like to share some of their feedback:
That’s why we’re talking to some of the leading global employers of finance professionals about the CGMA designation. Over the past three years, I’ve been working with a number of Fortune 100 companies in both my former role as director of global corporate relations for the Chartered Institute of Management Accountants (CIMA), and more recently as director for business development for AICPA. I’ve spent much of this time learning what leaders of finance teams and departments around the world need to drive success. Now I speak with those same leaders and their U.S. counterparts about the CGMA designation, how it can help them develop their finance teams, and how CGMA designation holders are well positioned to be strategic advisors to organizational leadership. Our message resonates. Employers understand the key role that management accountants play, or should play, in guiding critical decisions and driving business performance. They have also shared some insights into their needs that can help us better serve CPA, CGMAs. I have found the interaction rewarding and thought provoking. Take, for example, the case of American Express (AMEX). The company has a significant finance organization, including many CPAs. Additionally, AMEX employs several CIMA-qualified CGMAs. In March, we were invited to participate in two AMEX career development expos, one in Phoenix and one in New York. Today’sCPA
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• CGMA information resources resonated; to view available resources, visit the website at cgma.org. • While several CPA, CGMAs stopped by, those CPAs who hadn’t heard of CGMA were interested in learning more. They appreciated that the CGMA designation recognizes their expertise and were encouraged that we were engaging their employer. • Younger employees at the start of their careers were interested in the CGMA and understood that they would need to get their CPA first. One employee pointed out that the CGMA presented a new incentive to pursue the CPA over other degrees and credentials, especially as he pursues his career in management accounting. • Senior-level finance professionals who were not CPAs visited our booth as well, and asked us how the CGMA designation might apply to them or their teams. We explained how the CGMA designation signals expertise and provides resources to keep designation holders at the top of their profession. As hiring managers, they saw the benefit of the designation in helping them identify capable candidates. As mentors and leaders, they saw the CGMA designation as a potential career enhancement for their existing staff.
We continue to work with organizations like AMEX and as our relationships deepen, we expect more opportunities to connect with finance professionals and leaders. But we’re just getting started. The CGMA designation is new to the market and we’re in the early stages of adoption among companies and organizations both here in the U.S. and abroad. Organizations with CPA, CGMAs in key strategic roles are leading the way. Our task is to help them along their journey and drive broader acceptance of the designation. ■ 21
Capitol Interest By Bob Owen, CPA | TSCPA Managing Director, Regulation and Legislation
A Successful Legislative Session By most accounts, the regular session of the 83rd Texas Legislature adjourned on May 27 having successfully accomplished many of the legislative goals set out at the beginning of the session. Legislators passed a balanced budget, which included approximately $1.4 billion in tax reductions and restored almost $4 billion in public education funding. They passed water reform and water funding legislation, overhauled high school graduation requirements, added more charter schools and increased charter school oversight, redesigned Medicaid long-term care services and instituted Medicaid fraud finding procedures. More controls were added to enterprise funds and the Cancer Prevention Institute of Texas, the taxpayer funded cancer research grant program (which Gov. Perry vetoed). Public universities must now offer students a fouryear fixed tuition plan and a new University of Texas university with a medical school will be established in south Texas. Although the session was deemed successful by many, there were a few shortcomings. Roads top that list. At the beginning of the session, all legislative leaders were saying that something must be done about transportation funding. The Texas Department of Transportation (TxDot) said they needed an additional $4 billion a year to meet Texas’ transportation needs. They didn’t get it. A number of legislators pointed out that Texas has reached the maximum in borrowed money for highway construction. TxDot did not get permission to borrow any more. There were a number of suggestions as to how to provide road funding, including dedicating all gasoline taxes to roads, raising the vehicle registration fee, using $2 billion from the Rainy Day Fund and even increasing the general sales tax with the increase dedicated to road debt reduction. New revenue initiatives were DOA this session. The only new money appropriated for roads was about $400 million dedicated to patching roads damaged by the increased oil drilling and production in Texas. This was a significant enough shortcoming of the session that road construction was added to the special session agenda (see Special Session below). Not everyone was happy with the session. Conservatives in the Legislature have a long list of initiatives that didn’t make it during the session, starting with gun legislation. There were 106 bills filed with one of the words gun, firearm or ammunition in the bill caption; but most of them were shot down. Almost all of them were some form of Concealed Handgun Licensee liberalization or anti-federal gun control proposals. In one of the two Saturday House sessions, almost the entire agenda was gun legislation. Other issues conservatives pushed, but did not pass, included abortion restrictions (also included in the Special Session call), school vouchers, drug testing for welfare recipients (they did pass drug testing for unemployment compensation
applicants) and a more restrictive constitutional limit on state spending. Democrats, while most voted for the budget compromise (see the Budget below), are still not happy with public education funding and are hopeful that the issue will return via a special session in 2014 after the current public school lawsuits work their way to and through the Texas Supreme Court. Those lawsuits were held in abeyance by the Federal District Court in Austin pending the completion of the legislative session. As I write this, Judge Dietz is considering taking additional testimony before finalizing his preliminary ruling that the state’s education funding system is unconstitutional. At the rate the lawsuit is progressing (or not progressing), it might not reach the Legislature, if at all, before the regular 2015 session. A wide variety of constituencies (Democrats, citizen advocacy groups, doctors, hospitals, local governments, big business and most health care providers) are not happy with the official state response to the Affordable Care Act, commonly referred to as “Obamacare.” Under Obamacare, the feds will pay for 100 percent of Medicaid costs for several years (I think it drops to 90 percent thereafter) if the state will expand Medicaid coverage to include more lower-income citizens. Perry has adamantly opposed the coverage expansions claiming it will bankrupt the state, and the Legislature has supported that decision. Every time a legislator tried to pass a bill, an amendment to a bill or a rider to the budget that might give a little daylight to a possible compromise with the feds to get federal funding, the Legislature turned it down. This is one of the places where the conservatives prevailed. Sunset renewal legislation was passed to renew the Public Utility Commission, the Texas Higher Education Coordinating Board, the Department of Information Resources, and the Architectural and Engineering boards, but the Legislature also failed to renew some important agencies. Sunset is the process whereby a state agency’s authorizing legislation must be renewed every 12 years or the agency goes out of existence; at least that’s the theory. This session, neither the Texas Education Agency (TEA) nor the Railroad Commission (RRC) was renewed. This is the second session in a row where the RRC’s sunset legislation failed, but they are still in business. The RRC has been temporarily extended until 2017; that’s two sessions out. The TEA only got a one session extension to 2015.
Bob Owen, CPA, is TSCPA’s managing director of regulation and legislation. Contact him at firstname.lastname@example.org.
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The Sunset Advisory Commission has recommended changing the name of the RRC to the Texas Energy Commission for two sessions, as well as suggesting more restrictions on fundraising by commissioners and a requirement that a commissioner resign before running for another elective office. Most pundits say the pushback by the commissioners on these issues is why the renewing legislation keeps failing. In an interesting twist, the requirement for a commissioner to resign before seeking another elective office passed in the Texas Ethics Commission (TEC) sunset renewal legislation. Perry vetoed the TEC renewal legislation because of the RRC commissioner amendment. THE BUDGET The budget bill, officially known as the Appropriations Act, is the only law that the Legislature must pass. Of course, they passed 1,636 more bills that we might be able to do without. The budget was finally passed on the last day of the session and the rules had to be suspended to allow it to be considered on the last day. The budget negotiations included the traditional differences between Democrats and Republicans, but considering the substantial Republican majority, the Democrats’ emphasis on public education funding fared well. The reason the bill went down to the wire had more to do with differences between the House and Senate. The total budget compromise was a complicated process that included more than just Senate Bill 1, the official budget bill. The final budget will spend $197 billion over the next biennium with about $97 billion of that from Texas revenues and the rest from the feds. The budget package included at least six bills and one proposed constitutional amendment. The final budget deal won’t be in effect until and unless the voters approve the constitutional amendment in November. The proposed constitutional amendment establishes a revolving water fund, which will be funded by $2 billion from the Rainy Day Fund. Without voter approval, the entire water funding mechanism goes down the drain. In addition to the normal issues of how much to spend on what, Perry insisted that a $1.8 billion tax reduction be included. That proved to be a challenge, but with several different bills addressing the issue, they passed about $1.4 billion in tax reductions and that was close enough for Perry. Over $700 million of the tax reductions comes through changes in the franchise tax (see Franchise Tax: New Provisions for the details). The final budget does use a total of $3.9 billion from the Rainy Day Fund, including the $2 billion for water. It also spends all the money in the System Benefit Fund and eliminates the fees on your utility bills that fund the fund. The System Benefit Fund was established to help the needy pay their utility bills and the revenue to do so comes from a charge on everyone’s electric utility bill. That small charge is eliminated Sept. 1. The fund has accumulated a balance of over $600 million because the Legislature did not make an appropriation to use the funds as intended or at all. CPA Sen. Tommy Williams wanted to refund the fund balance to utility customers, but the Democrats insisted the funds should be used for the intended purpose (a somewhat novel idea in the Texas Legislature). The compromise has the $600 million balance appropriated to give financial aid to qualifying individuals to help pay specific electric utility bills Today’sCPA
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PLAYING DEFENSE We reported on playing defense in the last Capitol Interest article. I’m happy to report that all of our defensive efforts were successful and none of the bills we opposed passed. Those bills were not pursued by the author at our suggestion, modified to mitigate our concerns or defeated before reaching the House or Senate floor for debate. We opposed bills that would have diluted professional standards, opened the door for unlicensed accountants to perform services currently restricted to CPAs and eliminated CPAs in business and industry representation on TSBPA. Once again, many thanks to our key person volunteers for their efforts in contacting the right legislators at the right time to be sure our concerns were heard. Part of our ability to play defense is a result of our bill review process and most importantly our volunteer bill reviewers. We have 23 CPAs who volunteer to review bills on a subject-matter basis and 14 of them reviewed every bill sent to them on a timely basis. That’s 256 bills that were reviewed timely deep in the heart of busy season. With input from bill reviewers, we are better able to quickly determine if we need to take action or follow a bill to monitor any potential changes. THANKS FOR YOUR SUPPORT TSCPA had a successful legislative session, but it was a lot of work. I want to express my appreciation for all the wonderful volunteer efforts. Not only do we have bill reviewers and key persons mentioned above, but we have a cadre of Legislative Regional Coordinators who recruit and administer our key person program and a Legislative Advisory Committee that does pre-session work to determine what should be on our legislative agenda. There is also a small group of experienced volunteers who work with us in short notice situations during the session when an action decision needs to be made timely. And it all starts back during the elections, so I must also thank all of our members who contribute to our CPA-PAC; without that foundation and other election support, our job in Austin would be much more difficult. Our Austin staff does an excellent job of administration and coordination, so I hope you will express your appreciation to Linda Messing, Lucy Medrano, Kaira Tanwar and Diane Joiner.
Capitol Interest continued from page 23
over the next three years; but the collections for the fund will be eliminated this year, so the program goes away after the money runs out. A SUCCESSFUL SESSION FOR CPAS CPAs also had a successful session. The bills we supported passed and the bills we opposed failed. Our volunteer members, staff and legislative consultants worked hard to make it so. The CPAs who visited the Capitol last January during TSCPA’s Midyear Board of Directors Meeting set the stage by demonstrating our substantial presence to legislators. CPA legislators Sen. Tommy Williams (R-The Woodlands) and Rep. John Otto (R-Dayton) sponsored our proposed changes to the Accountancy Act and the bill moved through the Legislature with relative ease. It was signed into law by Perry on May 10. Key persons contacted pertinent House and Senate committee members to show our support for the bill, which certainly helped with the smooth process. The main purpose of the bill was to protect the confidentiality of complaint investigations against CPAs. There was a potential conflict between the Accountancy Act, which guarantees investigation confidentiality unless and until a CPA has been sanctioned, and the Open Meetings Act which gives the public access to open meetings. The question was whether an enforcement committee meeting was an open meeting or a closed meeting. The Open Meetings Act now identifies such meetings as closed. Other changes included some clarifications about client confidentiality, repeal of some outdated examination provisions and granting permission to the Texas State Board of Public Accountancy (TSBPA) to waive fees in extenuating circumstances. SDSI The other bill we supported was the renewal of the selfdirected, semi-independent (SDSI) agency status for TSBPA as proposed by the Sunset Advisory Commission (SAC). The renewal was successful, signed into law by the governor on May 24. TSBPA will continue to operate outside the legislative appropriations process, relying on license and exam fees for operating revenue with budgets determined by the board. TSBPA will continue to pay $703,344 per year into the state’s general revenue fund for that privilege. The renewing legislation did add the following requirements for SDSI agencies: • Makes SDSI status permanent and subject to sunset review only as part of the normal sunset review of the agencies’ underlying legislation. • Requires the agencies to comply with state purchasing requirements, interagency transfer voucher requirements, travel requirements and travel reimbursement rates, and prompt payment requirements. • Requires that annual reports to the Legislative Budget Board include trend performance data on salary, per diem, and travel expenses for the preceding five fiscal years; the agencies’
• • •
operating plan for two years; and the agencies’ budget and trend performance data for the preceding five years. Prohibits the agencies from holding funds in an account that is not under the control of the state comptroller and requires the agencies to use the comptroller’s uniform statewide accounting system. Requires the agencies to remit all administrative penalties to the comptroller for deposit in the general revenue fund. Subjects the agencies to open meetings and open records requirements. Includes agencies’ employees in the Employees Retirement System.
TSBPA was already doing all of the above except for remitting administrative penalties for deposit to the general revenue fund. TSBPA was sending money from penalties to the Fifth-year Accounting Scholarship Fund. It looks like SAC got most of the above recommendations from observing TSBPA practice and procedure. There were several other state agencies seeking SDSI status this session, but that legislation bogged down in controversy. As a result, a bill was passed directing SAC to do a study of SDSI basically to develop a template that could be followed by the Legislature to help determine agency eligibility for SDSI status. My guess is SAC will use TSBPA as one of the models to construct the template. SPECIAL SESSION Yes, I know the governor called a special session, but because our copy deadline is before anything was done in the special session, I can only offer a few comments. First, legislators can only consider the items put on the special session “call” by the governor. The original purpose of the special session was to deal with redistricting. About two weeks into the session, Perry added transportation infrastructure funding, abortion procedures and legislation relating to establishing a mandatory sentence of life with parole for a capital felony committed by a 17-year-old offender. The specific call wording for redistricting was “Legislation which ratifies and adopts the interim redistricting plans ordered by the federal district court as the permanent plans for districts used to elect members of the Texas House of Representatives, Texas Senate and United States House of Representatives.” Some thought this would be about a five-day session where the legislators simply passed new districts that complied with those temporary districts established for the last elections. It turned out to be much more complicated and when it became obvious the session would likely run the full 30 days, the governor added the other items. At this point, I can only make predictions and my predictions are usually wrong. By the time you read this, you will already know what happened, so I’ll forgo my faulty foresights. I just hope that when you read this, we are not into our second special session. ■ Today’sCPA
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Franchise Tax: New Provisions The 83rd Texas Legislature passed several changes to the Texas franchise tax. One bill alone reduces franchise tax revenue by $715 million and another offers combined franchise tax and sales tax credits estimated at $240 million. While the overall effective date of the law is Sept. 1, 2013, effective dates for specific provisions may be different. Here is a list of the major changes. Franchise Tax Reduction – Provides a temporary franchise tax reduction of 2.5 percent for returns filed in 2014 and 5 percent for returns filed in 2015. The 2015 reduction is contingent on certification by the state comptroller that sufficient revenue is available. These rate reductions include EZ filers. Minimum Deduction – Provides a minimum deduction of $1 million for all businesses instead of providing a small business exemption of $1 million. This minimum deduction has no expiration date and is inflation adjusted every two years. The maximum compensation deduction per employee is also inflation adjusted. Retail Rate – Adds automotive repair services, rent-to-own entities, businesses that rent or lease tools, party and event supplies and furniture, and businesses involved in heavy construction equipment rental or leasing activities to the list of entities that qualify for the reduced retail rate. R & D Credit – Companies may take a franchise tax credit for 5 percent of the difference between the qualified research and development expenses incurred in the tax year on which the report is based and 50 percent of the average amount of qualified research expenses incurred in Texas during the previous three tax years (or 2.5 percent if the company has no qualified research in the base period) up to 50 percent of the company’s overall franchise tax liability with an unlimited carry forward of unused credits; OR a company can take a sales tax exemption on tangible personal property directly used or consumed in qualified research or of qualified services. Pharmacy Networks – Allows pharmacy networks to exclude from total revenue reimbursements pursuant to contractual agreements that are paid to pharmacies in the network. Transporters – Allows entities primarily engaged in the business of transporting aggregates and barite to exclude subcontracting payments for delivery costs from total revenue. Landman Services – Allows entities primarily engaged in the business of performing landman services to exclude subcontracting payments for landman services from total revenue. Vaccines – Requires taxable entities to exclude costs paid for vaccines from total revenue. Transporters of Goods by Waterways – Requires entities primarily engaged in the business of transporting goods by waterways that do not use the cost of goods sold deduction to exclude from total revenue direct costs of providing transportation services by waterways. Today’sCPA
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Registered Motor Carriers – Requires registered motor carriers to exclude flow-through revenue derived from taxes and fees from total revenue. Subcontracting Payments – Adds subcontract payments to flow-through funds that are excludable from total revenue for payments to provide service, labor or materials in connection with improvements on real property and adds “remediation” as one of the eligible activities. Petroleum Pipelines – Allows a cost of goods sold deduction for petroleum pipeline companies for the cost of transporting products owned by others. Movie Theatres – Allows movie theatres to include costs associated with the acquisition, production, exhibition, or use of a film or motion picture (including expenses for the right to use the film or motion picture) in the cost of goods sold deduction. Combined Groups Providing Electric Services – Entities that provide retail or wholesale electric utilities cannot be included as a member of a combined group if less than 5 percent of the combined group’s total revenue is derived from providing retail or wholesale electric utilities. Internet Hosting – A receipt from Internet hosting is from business done in this state only if the customer to whom the service is provided is located in this state. Relocations – Provides a deduction for the moving expenses of businesses that relocate their principal place of business to Texas. Historic Structures – Provides transferable franchise tax credits to entities that incur qualified expenses for rehabilitation of historic structures beginning on Jan. 1, 2015. Apportionment Reporting – Repeals Sections 171.103(c) and (d), Tax Code, relating to the requirement that a taxable entity that is a combined group include in the group’s initial and annual franchise tax reports information regarding the gross receipts of group members who do not have a nexus with Texas. Crop Dusters – Requires agricultural aircraft operations to exclude from total revenue the cost of labor, equipment, fuel and materials used in providing these services. Political Subdivision Corporations – Clarifies that certain political subdivision corporations are exempt from the franchise tax. ■
Follow LEADER THE
A CONVERSATION WITH YOUR NEW CHAIRMAN By Anne McDonald Davis
hen recently introduced at a Dallas Chapter event, incoming 2013-14 TSCPA Chairman Willie Hornberger was described as follows: “Willie is a great leader. He has a lot of followers, because no one can keep up with him. But we all try, because his enthusiasm is contagious; he has a way of making you want to be involved. Everyone has a story about how they met Willie, and it seems that everyone has a story about how they agreed to do something they swore they’d never do because Willie asked … and were happy to help … because Willie is just someone people want to follow.” Within minutes of getting into a conversation with the Dallas tax attorney, it’s clear how he came by such a reputation. Hornberger’s energy and positive attitude bounce off the walls. Whether talking about his family, his profession, mentoring, volunteering, “passionate” is the description that fits. Locally, he has been involved in civic efforts ranging from neighborhood outreach to the city’s recently completed and signature Klyde Warren Park downtown to the Holocaust Museum. His Society volunteer efforts are similarly wholehearted. Growing up in a Laredo family of mixed heritage, including Mexican and Jewish, Hornberger says he always felt at home in that diverse community. “There is no doubt that growing up in Laredo helped shape who I am today. Everyone is so accepting and welcoming there,” he said. One of his driving beliefs is that “every human being be treated with dignity.” He took some time as he began his year as chairman to sit down with Today’s CPA and talk about his philosophy and his background.
Q: Why did you choose the accounting profession? A: (laughs) That’s easy. My brother, Boxy, went to UT (the University of
Texas) and majored in accounting. He’s six years older than me and he gave me a lot of great advice when I started college. I owe a lot to him for leading me in this direction. In the spring semester of 1982, I took Intermediate Accounting I from Dr. Paul Newman. He would not remember me, but his teaching in that course ended up being pivotal in my decision to pursue a degree in accounting. He took a very complicated subject and did more than find a way to convey it in a way that I could understand – his passion for the subject brought it alive for me, made it relevant and inspired me. Every time I asked him a question during that course, he made me feel that answering my question thoroughly was the most important thing on his mind at that particular moment. I am so grateful for the opportunities that my accounting degree and the profession have given me. That degree and my CPA certificate have opened more doors for me than I could have ever possibly imagined.
Q: You share this message when speaking to students today. A: Yes, it is amazing. You can do so many things with a CPA certificate
and an accounting education. You can be a practicing accountant; go into law; you can go into finance; go into business. And along the way, the CPA profession has given me a lot of civic opportunities also. As I sit in board meetings, I notice when a CPA walks in and shares his or her insights, everybody listens because of the respect that CPAs carry. I want to stress during my year as chairman the enormous responsibility that we have as CPAs; it is a legacy. What I tell students is that we don’t carry forward equipment; we don’t carry forward widgets. What we carry forward as CPAs is a legacy that has been left to us over decades: a legacy of trust and integrity. We need to spend time and effort training these new generations the same way we were trained, the same way people invested in us. continued on next page
Photographs © Scott Williams, ScottWilliamsPhotography.com.
FOLLOW THE LEADER continued from page 27
Q: And why accounting and tax law? A: Tax law, easy. I wanted to pursue law school and I wanted
to pursue an area where I could use my CPA certificate and my accounting skills. Tax and corporate law seemed to be the right fit. I was able to use my accounting background, my understanding of financial statements, the fundamentals of debits and credits – all of that has served me well in my tax law practice.
Q: So the CPA certificate came first and then you went on to law school? A: Actually … I took the CPA exam my second year in law school, which is probably not a good idea. (laughs) I told some students just yesterday, that’s not something I would recommend in hindsight.
Q: So once you recovered from your nervous breakdown …
A: My wife still tells me that it’s unbelievable I did that. What I advise students now is to get it done as soon as you’re finishing your accounting degree.
Q: So tell us about your practice. A: I got here (Jackson Walker/Dallas) in 1987 and have spent my career here. I have really had two areas of practice during those years, all kinds of transactional work plus some tax controversy work. And taxes have helped me in understanding the way transactions and acquisitions work.
Q: Not everyone has the opportunity to grow with one firm from the beginning, yes? A: I will be the first to tell you that I didn’t do it on my own. I had two mentors, Larry Bean and Vester Hughes. Both of them believed in me and taught me about tax law, but most importantly, defined “character” for me. That was huge.
Q: Define character? A: Yes, and what I mean by that is they taught me not only how
to be a good lawyer, but they modeled integrity for me and taught me about life and how to serve my family, clients and community well. One of the last things Larry said to me – Larry passed away about six years ago – was to get your mind off yourself and onto helping someone else. How many people hear that advice from their boss? That admonition from Larry served me well. Vester has taught me a lot about tax law, but even more importantly, he has continuously reminded me of my blessings and challenged me to maintain a balance in my life. The best advice I ever got from Vester was, “Don’t try to be like me. You have an incredible family. Go home and take care of that family.” That was great advice for the demanding profession that I’m in.
Q: Our mentors have a lot of influence in passing the torch. A: They both had a profound impact on me. This kind of works
into why I am so passionate about the accounting profession; this 28
relates to my theme for the year. It’s about believing in people and serving them well. I’m passionate about helping young people because of what Larry and Vester did for me. I totally understand that I would not be where I am but for people believing in me and helping me along the way. Members of the accounting profession believed in me and gave me opportunities to speak around the state and helped my career tremendously. Now I feel a very big responsibility to turn around and do that for other people who are just getting their start. A lot of what I do is meet with young people along the way, encourage them to pursue degrees in accounting, and then try to help them in any way I can – the same way that I was helped.
Q: What else is rewarding about your career? A: The most rewarding is serving people. People ask me how I do everything I do. Law and accounting work can be difficult and at times stressful, adversarial. But by embracing a commitment to serve the people around me and in my community, my job is also incredibly fulfilling. Also rewarding to me are the civic opportunities that my profession has given me. I cannot describe in words the fulfillment you get by helping somebody. There was this one time a lady came up to me and just gave me a big old hug for helping her neighborhood. That carries me a long way. It helps me get up in the morning and understand why I’m doing what I’m doing.
Q: What’s your biggest challenge? A: Time. Time! My wife helped me early in our marriage
implement good time management skills, but still … getting everything done in 24 hours is a challenge. My primary mission right now is my kids: I have one in college and a junior in high school and one in eighth grade. My kids and my wife are my focus right now. I want to keep my eye on that.
Q: What do you see as the top issues in the profession? A: One of the top issues is the tremendous volume of laws,
regulations and authorities that we must all know and understand to do our jobs well. We have to stay abreast of all that information and provide the best advice for our clients. Here’s the crux – we have to do that in a cost-effective manner. That’s why TSCPA is always looking at new ways of providing education to people around the state to keep them up-to-date on these issues. I see it every day; it’s just a lot. And CPAs more than tax attorneys are on the front line, April 15, September 15 and October 15, making some very, very difficult decisions for clients.
Q: What advice would you give to students interested in becoming a CPA? A: In addition to reminding them of the doors that will open to
them, I always say, “Be yourself, be humble. Show enthusiasm. Be loyal, but not blind. Don’t be afraid to fail – learn from it.” And this is foundational, very important to me, “Don’t forget where you came from.” Today’sCPA
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Q: And where did you come from? A: An interesting story … I came from Laredo and I grew
up on a farm on the Rio Grande. My grandparents on my mother’s side are from Mexico. My grandfather grew up in Monterrey, Mexico. My mother’s family has long roots there. My grandfather came over here dirt poor and worked as a ranch hand in south Texas. He later got some opportunities in business. One of the things that’s incredibly humbling for me is that I know I am living out his dream. There is not a week that goes by that I don’t think about that. To know that his grandson is the chairman of the Texas Society of CPAs would absolutely floor him (voice chokes). So he is an inspiration to me for what he had to overcome and the legacy he left.
Q: You’ve been involved with TSCPA and the Dallas Chapter for a number of years. Why did you become a volunteer? A: This goes back to my dad. He told me so many times as a
kid, so many times – you have to give back to the community. So for me, it wasn’t even a question. Giving back to my profession and my community was what was expected in my family, so when I was invited to get involved with TSCPA through the Dallas Chapter, it was just a natural thing for me to do.
Q: How do you manage to find so many ways to make others want to be involved in volunteering?
A: This is why role models are so important, mentors. I just
follow what Larry and Vester did for me; I say OK, that works. They believed in me and that’s what I’ve got to do for other people. I’ve got to believe in them. Especially students, we have to believe in them. That’s where they find hope. And through hope comes opportunity. I also believe passionately about giving people ownership over projects, pushing them out, helping them lead and giving them the credit so that they are recognized. And then they become passionate too. My mentors never, never tried to steal the spotlight. They gave me opportunities and supported me in doing what I wanted to do, but they didn’t try to do it for me. So I know to be true to myself, I’ve got to pass that on to others. As excited as Hornberger is about his upcoming year as chairman, he remains just as enthusiastic about family life. His children Jake, 19; Allie, 17; and Claire are “part of a hunting and fishing family.” “That’s what we love to do together – hunt and fish,” he smiles. “I love to watch my kids hunt a deer or a turkey. We also love the Gulf Coast; Port Aransas is where we do a lot of our fishing. That’s one of my fun memories as a kid, going fishing, and I want to pass that on.” Of his wife of 23 years, Gigi, Hornberger says: “She is my best friend, my favorite story. She’s supported me all along the way and is the best thing that ever happened to me.” ■
Anne Davis, ABC, is a freelance reporter, writer and editor in Dallas, Texas.
Feature By Juan Alejandro, Jr., Ed.D., CPA, and C. William (Bill) Thomas, Ph.D., CPA
Auditor Independence: Still Hazy After All These Years! Auditor independence is apparently easier to define than it is to implement. The literal definition seems very clear and yet, operationally, maintaining a clear perception of audit independence has proven increasingly difficult as the financial landscape has changed over the years.
After scandals in the early 2000s, the passage of the SarbanesOxley (SOX) Act of 2002 and the creation of the Public Company Accounting Oversight Board (PCAOB) significantly strengthened auditor independence by (1) prohibiting auditors of public registrants from concurrently offering certain types of non-audit services; (2) requiring mandatory rotation of lead engagement partners after five years and of other engagement team partners after seven years; and (3) requiring audit committees comprised of independent directors who have sole authority to hire and replace external auditors. All of these reforms have required significant changes in the structure and practices of the boards of public companies, as well as the CPA firms that audit them. Nevertheless, the financial crisis of 2008-09 and ensuing deep business recession have caused Congress, the Securities and Exchange Commission (SEC) and other regulatory bodies to conclude that auditor independence from public registrants is still in need of further
strengthening. Many of the financial institutions that either went out of business or were forced to take government bailouts to survive had received unqualified audit reports within weeks of the crisis, causing regulators to question whether the underlying reason had its roots in the relationship between the banks and their audit firms. Recent inspections by PCAOB have found that auditors still may be “too cozy” with clients, establishing business alliances, ventures and other agency relationships, and in general failing to maintain the proper degree of professional skepticism.1 As a result, PCAOB is conducting hearings concerning auditor independence, and is considering recommending that the SEC demand mandatory rotation of audit firms among public companies. Furthermore, in response to the debt crisis in Europe, the European Commission (EC) has recently issued a “green paper” recommending still more sweeping changes to the audit landscape to improve auditor independence. Besides mandatory audit firm rotation, the EC proposes (1) periodic tendering of audit engagements, putting them up for bid after a fixed number of years; (2) formation of “audit only” firms to do audit work; (3) requiring “joint audits” (more than one audit firm) for every audit engagement; and (4) proposing payments to auditors by governmental agencies who then impose levies on registrants for audit services.2 It is clear that auditor independence, or perceived lack of it, continues to be a controversial issue that has attracted a great deal of attention from global regulators who are in a position to do something about it. The decisions that these regulatory bodies could make within the foreseeable future have the potential for significantly altering the process of appointment and tenure of auditors, dealings between them and their clients, and payment of their fees. In this article, we discuss the multi-dimensional nature of auditor independence. We also discuss measures that have been taken or considered to enhance audit independence, along with the perceived impact of those measures.
Juan Alejandro, Jr., Ed.D., CPA, is director of Internal Audit and Management Analysis at Baylor University. He may be reached at Juan_ Alejandro@baylor.edu. C. William (Bill) Thomas is J.E. Bush Professor and Master Teacher at Baylor University. He may be reached at Bill_ Thomas@baylor.edu.
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A MULTI-DIMENSIONAL CONCEPT The American Institute of CPAs (AICPA) professional audit (AU) standards stipulate that an auditor “must be without bias with respect to the client, since otherwise he would lack that impartiality necessary for the dependability of his findings, however excellent his technical proficiency may be.”3 Similar definitions exist in professional auditing literature elsewhere in the world. Independence has been understood to be the cornerstone of the auditing profession since its beginnings.4 Without it, the audit process becomes a meaningless exercise and the auditor’s report valueless. AICPA, as well as international professional standards, stress that independence is a multi-dimensional concept. The auditor must not only be independent in fact, but to third parties, must appear to be independent.5 Independence in fact is a state of mind known only to the auditor. It is impossible to monitor or regulate. No code of conduct can stipulate operational rules that make one independent in fact, since it is an intrinsic personal quality. The auditor either is, or is not, independent in his/her mind. To acquire independence, in fact, requires intellectual honesty and self-restraint. But how can a professional person truly be totally independent in fact of the client who pays the fee and who controls the tenure of appointment? Historically, CPAs are believed to maintain independence in fact because of enlightened self-interest: “The accountant in every auditing engagement has a coemployer, the public. If his work is not satisfactory to those who ultimately make use of it he will no longer be useful to the client who pays his fee. It is therefore … not necessarily nobility or extraordinary strength of character that makes the accountant independent but primarily an instinct of professional selfpreservation.”6
This implies that the auditor will do whatever is necessary to stay independent in mental attitude, because the reputational cost of loss of independence is greater than the cost of maintaining it. Independence in appearance requires avoidance of certain financial or managerial relationships with the client. Independence in appearance implies that an informed third party would recognize the CPA’s relationship with the client as free from bias. This dimension of independence is addressed by various codes of conduct of AICPA, as well as those of various state CPA societies, state boards of accountancy, PCAOB, the Government Accountability Office (GAO), the SEC, and other regulatory bodies. These codes lay out circumstances in which the presumption of independence is lost. By conducting oneself in such a way as to stay within the boundaries contained in these codes, a CPA may be recognized as “independent.” A CONFLICTED CORNERSTONE Independence was officially established as the cornerstone for auditing practice in the United States when Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These acts, intended to protect the interests of the investing public, mandated an audit of all public entities, but entrusted the function to the private sector (independent accountants) rather than in an agency of the federal government. Thus, auditing was established as the franchise of the public accounting profession, but constrained by two necessary prerequisites: independence and competence. Today’sCPA
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From the beginning, auditors have been conflicted in their efforts to remain the independent watchdogs of the public while at the same time serving their own interests and those of clients. The fact that an auditor’s fees are paid by the very entity against which he/she might one day have to take an adversarial position presents the CPA with a conflict unlike that faced by any other professional. CPAs are professionally trained to respond to, and profit from, the market demand for an increasingly expanded scope of services, some of which might be restricted by the audit independence mandate.7 The growth and consolidation of public companies, the explosion of technology, and globalization of business beginning in the second half of the 20th century and expanding in the years since, have created a host of new opportunities for CPAs to expand their scope of services and their revenue bases. In 2011, the six largest firms earned a combined $33 billion in revenue, only about a third of which is related to audit services. Over the years, CPA firms whose initial revenues were principally derived from audit services have evolved to multi-dimensional, multi-national professional service firms, only a fraction of which is derived from audits. RESTRICTING NON-AUDIT SERVICES TO ENHANCE INDEPENDENCE For years, CPA firms that performed contemporaneous nonaudit services successfully kept up the appearance of audit independence by maintaining separate organizational staffs (many of whom were not CPAs) for consulting work. However, several rounds of financial scandals, occurring roughly once per decade from the 1970s through the early 2000s, brought a negative public perception of erosion of independence on the part of CPAs whose practices include a substantial amount of non-audit fees. The profession received criticism from Congress and the SEC regarding non-audit services in such fields as bookkeeping, financial systems design and consulting, actuarial services, internal audit outsourcing, and human resources consulting. This criticism was addressed in SOX, when nine types of non-audit services were prohibited for auditors of public companies. Firms have continued to grow these services, however, by retaining these lucrative lines of work, but only performing them for non-attest clients. Some firms have spun their consulting divisions off as separate firms. The EC, in the wake of a debt crisis that has precipitated a deep business recession across Europe, has recently focused its attention on enhancing the audit function as a way to rebuild confidence in its financial systems. Restricting, or totally prohibiting, non-audit services to audit clients is one of the measures currently under consideration. At present, only France requires a total ban on non-audit services, with a diversity of less-restrictive bans in other European Union (EU) nations. One of the measures mentioned by the EC is the creation of “pure audit firms” (akin to regulatory inspection units). This measure has drawn fire from various EU member nations as being both extreme and unrealistically costly, but nonetheless is still on the table. MANDATORY AUDITOR ROTATION TO ENHANCE INDEPENDENCE Another source of eroding public perception of auditor independence comes from lengthening auditor tenure. At the largest 100 American companies, by market continued on next page 31
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capitalization, average auditor tenure is 28 years. For Fortune 500 companies, average auditor tenure is 21 years. According to research firm Audit Analytics, nearly 175 companies in the S&P 500 have had the same audit firm for over 25 years; 16 percent of the Russell 1000 companies have engaged the same audit firm for 40 years or more, and eight companies in that group have not changed audit firms in the last century. Similarly, lengthening auditor tenure has been perceived to be a threat among EU nations. The issue is: as auditor tenure increases, does the auditor become, perhaps unintentionally and even unconsciously, biased and lax in applying professional skepticism, leading to audit failure? If so, the logical solution appears to be to limit auditor tenure to a period of years, followed by mandatory firm rotation. The idea of mandatory term limits for auditors as a cure for alleged audit failures is not new. It was first proposed in the wake of accounting scandals over 35 years ago by the Metcalf Committee of the U.S. Congress. In response, AICPA established the Cohen Commission to investigate and reform the audit process. Their report, issued in 1978, recommended against imposing term limits for auditors primarily because, in their opinion, the projected cost of such a measure would have far outweighed the benefits. The idea of mandatory term limits for auditors was again floated after the Enron-era scandals in the early 2000s, prompting a GAO study of the pros and cons of auditor rotation. Their 2003 report projected a 20 percent increase in initial audit costs for larger public companies. Furthermore, in a GAO survey of Fortune 1000 CFOs, audit committee chairs and public accounting firms, 79 percent responded that rotation of audit firms actually increases, rather than decreases, the risk of audit failure in the early years of the audit. These figures are supported by data from Audit Analytics on Russell 1000 and Russell 2000 companies that showed companies with audit tenure of five years or less paid substantially more in audit fees per million dollars in revenue than companies with longer tenure. Furthermore, and perhaps surprisingly to some, these increased costs were actually accompanied by an increased, rather than decreased, risk of audit failure. To support these findings, a steady stream of academic research has provided evidence suggesting that financial reporting quality (as measured by the frequency of abnormal accruals) actually is greater in long-term auditor relationships than in short-term relationships. The alleged reason for this is that long-term tenure on the part of an audit firm produces a wealth of knowledge about the client that leads to improved auditor judgment. Additional academic research on auditor tenure and fraud has shown that undetected fraud is more likely in the early years of the auditorclient relationship than in longer-term relationships. Still other research shows that audit opinions issued to companies with impending bankruptcy (considered the correct decision) are less likely to be modified for going-concern when audit tenure is short rather than long.8 Based on these research findings, in addition to cost considerations, it appears that mandatory audit firm rotation is precisely the opposite of what should be done to improve audit quality. However, in spite of these findings, and in the face of much opposition from the business community and the large CPA firms, mandatory periodic audit engagement tendering with firm 32
rotation after a given period of time continues to be put forward by some prominent observers in the United States, as well as the EU, as a primary means of helping to assure the appearance of independence on the part of auditors to the investing and lending public.9 At present, it is far from clear that PCAOB, which has the authority under SOX to require it, will not act to impose at least some form of mandatory audit rotation on public companies. SOX took a step toward auditor rotation by imposing term limits on lead and other engagement partners. Specifically, Section 203 of SOX requires that the lead engagement partner rotate off every five years. In addition, lead partners must complete a five-year “time out” period before returning to the engagement in a leadership role. Other partners on the engagement team must rotate off the engagement every seven years. Only a limited amount of research similar to that described for firm rotation has been conducted on auditor rotation, so whether this practice has improved audit quality is yet to be determined. NOT JUST FOR THE BIG BOYS Although the proposed reforms outlined above would apply only to auditors of public companies, it is important to note that the basic rules of independence and objectivity, as well as the challenges of maintaining independence, apply to all auditors, regardless of the size or ownership structure of their client bases. Potential threats to independence, such as providing non-audit consulting services, lengthened audit tenure and “cozy” personal relationships with clients, are at least as great for auditors of nonpublic companies as for those of public companies. It is reasonable to believe that the kinds of independence pressures experienced by auditors of public clients (such as pressure to see clients’ points of view or to “help them out” in a bind) occur with similar, or perhaps even greater, frequency for auditors of nonpublic as for public clients. Being too closely aligned with management can occur with clients of any size.10 Independence rules for auditors of nonpublic clients are governed by state boards of accountancy. Although exceptions for small entities may be appropriate, if independence rules are tightened for auditors of public companies, it is reasonable to assume that, in time, similar (if less stringent) reforms may also be proposed for audits of certain nonpublic entities. WHAT ELSE CAN BE DONE TO ENHANCE AUDIT INDEPENDENCE? It appears that, in spite of regulatory reforms of (1) restriction of non-audit services; (2) audit partner rotation; and (3) strengthened audit committees accomplished in SOX, regulators are still not satisfied with the current state of auditor independence. What else can be done to enhance auditor independence without the extensive and costly measures being studied by PCAOB and the EC? We recommend five long-term strategies. 1. Further audit committee reforms. Under SOX, audit committees are the clients of the CPA firm, with authority to continue or replace them as auditors. Written responses of some attendees at PCAOB’s hearings in June of 2012 contained some interesting proposals on ways to strengthen audit committees as a means of enhancing auditor independence. These include, but are not limited to, the following: (1) sharing with audit committees the results of PCAOB inspections of the company’s auditors and publishing the results of the CPA firms’ overall inspection program Today’sCPA
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for purposes of determining their independence; (2) revisiting and strengthening the requirements for qualifying as financial experts; (3) publicizing best practices learned through PCAOB inspections to members of audit committees to help them in their oversight responsibilities; and (4) providing enhanced and improved education of audit committee members, including on the subject of the importance of maintaining independence. 2. Improved quality of mandatory periodic ethics education for all CPAs that includes independence, integrity and objectivity along with judgment and decision making. Currently, 42 out of 50 states require from two to eight hours of mandatory ethics education every two to four years. While the amount of time devoted to mandatory ethics education has been substantially increased over the past decade, the content of these courses varies considerably. Perhaps AICPA and NASBA could take a more proactive role in designing an ethics curriculum to require more and better coverage of professionalism, independence, integrity and objectivity, as well as case studies in judgment and decision making that reinforce these concepts. 3. Improved education in professional skepticism. One of the key attributes of independence that is lacking on the part of some CPAs, according to PCAOB, is professional skepticism.11 Research in this area has been limited, but an academic model has been built that measures professional skepticism. Research in this area should be expanded to include how the attribute can be taught to, and developed in, practicing auditors, internal auditors and members of audit committees to the end that it may be measured and improved. 4. Audit firm rotation for offending firms. Although mandatory audit rotation is widely viewed as too costly and counterproductive, PCAOB and the SEC might consider using it as a last-resort punitive measure for firms whose periodic inspections continue to show evidence of audit failure through lack of independence. Similar action might be considered through the peer review process for auditors of nonpublic clients who are found to be lacking independence. Further research is needed to determine whether this represents a wise course of action. 5. Improving professional culture within audit firms. Academic research using social identity theory has revealed that auditors who identify socially more with the client than with their profession tend to yield more to client pressures, indicating impaired objectivity. Factors that increase auditor-client social identification include increased auditor tenure, client size (a surrogate for fees), and client image and prestige. On the other hand, auditors who identify with their profession or firm more than with clients are more likely to internalize the profession’s norms and values.12 As a result, professional identification should promote professional behavior and auditor objectivity. Measures that may be taken by practicing CPAs to enhance professional identity include maintaining CPA certification, along with membership and active participation in professional associations, such as AICPA, state societies of CPAs, and local chapters. Through professional training, reimbursement of dues, and by encouraging involvement in professional activities, auditing firms may be able to help their employees increase identification with the profession, thus improving their objectivity and independence. Such an influence must start at the top of the firms, with the partners modeling professional objectivity and stressing the importance of objective critical thinking in all decisions at all levels. Today’sCPA
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THE CENTRAL ATTRIBUTE Audit independence is the central attribute that makes the audit valuable in the business world. It must not be lost. Significant measures, such as limitation of non-audit services and mandatory partner rotation, have been taken by regulators in the past decade to strengthen independence. Research generally supports the conclusion that these measures are necessary. However, research also supports the conclusion that mandatory audit firm rotation is prohibitively costly and that once implemented, it might weaken rather than strengthen the quality of audits. At this point, if independence is to be further strengthened, it must be done from within the ranks of the auditing profession. The profession needs to be proactive in inculcating a higher level of professional identity into its members. Top management of audit firms of all sizes should model independence, integrity and objectivity, rather than become known as pawns in the hands of influential clients. Similarly, boards of directors of public and nonpublic entities should stress the importance and centrality of maintaining independence in all of its relationships with auditors. The incentive for taking these measures must be enlightened self-interest, both on the part of auditors and their clients. The public accounting profession needs to demonstrate worthiness of the public’s trust in performing the audit function or regulators will be forced to remove the mantle of the audit function from them. Surely, proactive measures taken by the auditing profession to strengthen its own independence will be regarded as worth the cost, especially when compared with the alternative, which is the loss of the profession’s only franchise, the audit function itself. FOOTNOTES 1. Public Company Accounting Oversight Board, Concept Release 2011-006, Concept Release on Auditor Independence and Audit Firm Rotation. Public meetings held August 16, 2011, March 21-22, 2012, and June 28, 2012. 2. Green Paper, “Audit Policy: Lessons from the Crisis.” COM (2010) 561final. Brussels 13.10.2010. 3. AICPA Professional Standards, Section AU 220.02. 4. Mednick, Robert. AICPA Chair’s Corner, 1997. 5. AICPA Professional Standards AU 220.03. 6. John L. Carey, ed., “Independence of Accountants,” The Journal of Accountancy. February 1945. 92. 7. Previts, Gary John. The Scope of CPA Services (A Study of the Development of the Concept of Independence and the Profession’s Role in Society). New York: John Wiley & Sons. 1985. 57-76. 8. Casterella, Jeff. “Auditor Tenure and Rotation: The Auditors, Are They A-Changin’?” Unpublished Working Paper, Colorado State University. 9. Examination of the transcripts of the PCAOB Hearing on Mandatory Firm Rotation, June 28, 2012, revealed support from approximately 50 percent of the respondents, mostly comprised of regulators and academics. Business respondents were almost universally opposed. 10. Czaja, Rita. “Should Sarbanes-Oxley Reforms Extend to Nonpublic Companies?” The CPA Journal (November 2005 special issue). 44-47. 11. Hurtt, R. Kathy, “Development of a Scale to Measure Professional Skepticism,” Auditing: A Journal of Practice & Theory 29, No. 1, May 2010. 149-172. 12. Bamber, E. Michael and Venkataraman M. Iyer, “Auditors’ Identification with Their Clients and Its Effect on Auditors’ Objectivity. Auditing: A Journal of Practice & Theory 26, No. 2, November 2007. 1-24. ■
Feature By Rabih Zeidan, Ph.D., CPA
Don’t Count Barcodes Out Yet: Streamlining Workflow and Operations CPAs may be called on by their clients to streamline workflows, automate data collection procedures and integrate data collected into application software. Regardless of a client’s size, type of industry, or nature of application, CPAs can apply their knowledge of accounting software and leverage their technology skills to generate more efficient operations and map collected data into general ledger and other applications. Barcoding is a simple and cheap technology to facilitate automation and integration of data collection. Streamlining operations and information flow for small businesses, even for CPA firms, can be easily and economically achieved through barcode technology. With the introduction of new mobile scanning applications, automatic identification of data and processes are more pivotal in capturing data and feeding it directly into computer systems. BARCODES FOR CHEAP AND MULTIPURPOSE APPLICATIONS Although Radio Frequency Identification technology (RFID) is readily available and is getting cheaper and applicable to smallsize products, it is costly in comparison to barcoding technology. Barcodes have an edge in a variety of applications especially when applied to electronically generated paper documents and to relatively inexpensive and tiny products. Barcodes are very cheap and can be applied to various software applications, to products regardless of value or size, and to printed documents as well. The adoption of the Universal Product Code in the early 1970s transformed barcode technology into a flood of business applications. Now, barcodes are once again turning the tide as an easy way for cell phone users to view and access information instantly. New scanning technology built into cellular phones will eventually expand into business applications. Microsoft®, Motorola® and other software companies are investing in scanning companies and technologies.1 Barcodes are still widely applied and represent a forceful technology that, in many cases, does not even require separate software! Barcode fonts can be purchased for a minimal fee of less than $100 and loaded into the “fonts” folder of the Windows® operating system.2 Whenever a number of a client, type of document or product ID is needed to appear or print as a barcode on a document to facilitate tracking and operational procedures, all the user needs to do is apply the barcode font to that specific cell (in a spreadsheet), or number in a word processing document, or data element in any other application software (similar to 34
selecting Arial, Calibri or other fonts). The data formatted with the barcode font will appear on the computer screen and prints (on paper, magnetic strips or affixed labels) as a barcode readable by scanning devices. BARCODES FOR OPERATIONAL EFFICIENCY AND ACCURACY The efficiency and effectiveness of scanning items at department stores and by package delivery companies have been demonstrated for decades. Consulting services provided by CPAs can leverage accounting systems knowledge, internal control activities and operations management to streamline processes, as well as data capturing and integration into accounting software. Furthermore, barcodes can be applied to unlimited types of applications. A small business manufacturing client, who had implemented an electronic timekeeping system for many years, wanted to track parts manufactured in the workshop at each manufacturing stage to capture labor time and to track percentage of completion for that job or part number being processed. The client needed to have better use of the timekeeping system and integrate it into capturing not only total hours when the employees clock in, but also the jobs the machinists were working on and the number of hours spent on each job. Two issues were involved: (1) streamlining the process of capturing the machinists’ time spent on each job or part manufactured, and (2) accuracy of entering the correct job or part number into the timekeeping system. These concerns are applicable to many industries and processes to ensure the accuracy of codes entered and the efficiency in entering data into the timekeeping system. As each job or part of an order had a “traveler” or “router”3 sheet with information about each manufacturing process, the task was automated and made easy by printing multiple barcodes representing job number, part number, and even the type of activity performed (see Exhibit A). The process of capturing hours worked by the machinists on a specific job or part was automated and simplified into punching one button on the time clock, scanning the employee badge, and then scanning the barcode on the router that represented Today’sCPA
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the job and part numbers the machinist was working on. Clocking out when the job was completed became as simple as clocking in: scanning barcodes with no keying or manual entry of any data. The machinists did not have to know the codes for each manufacturing phase or codes for any part. Codes, set up by engineers, were already encoded into a barcode printed on all forms, paper and electronic. The timekeeping system automatically captured and allocated the time of each employee to each job and to each part of that job. Data captured was then electronically transferred and incorporated into payroll and job costing reports. Another small business perfume merchant wanted to track individual perfume bottles bought in bulk (unlabeled) and then packaged and sold in retail. The CPA in charge of coding inventory accounts and maintaining the general ledger chart of accounts recommended barcodes packaged with label-making software to be installed. All individual items and boxes now have affixed barcoded labels. The client is now able to improve the timeliness and accuracy of tracking inventory from the time it is received in the warehouse to the time it is sold. The barcoded labels allow checking out individual items at the cash register point-of-sale and, thus, providing expedited and detailed tracking of sales with more accurate checkout at the cash register. Most point-of-sale registers are, or can be, easily equipped with scanning devices, and small businesses can utilize the efficiency and effectiveness of scanning a label rather than keying-in the item number.4 A CPA’s role in mapping these inventory items and associated tags to the inventory tracking software, and to the chart of accounts, becomes very pivotal in this automation process, which is supported with better controls and accurate data. DOCUMENT MANAGEMENT AND CAPTURING DATA ON PRINTED FORMS Many CPA firms can utilize barcodes in their front-end scanning procedures. Adding barcodes can assist in a variety of ways ranging from clients’ document retrieval to checking-out and checking-in of these documents, and to capture time and usage information for those documents.5 As clients’ documents are sorted, indexed and then scanned, barcodes can be added to the image/PDF e-file or individual forms and used to identify clients’ records (merging codes of client number, indices of working papers or types of documents, and filing locations). Labels with merged barcodes can be affixed to hard copies if archival copies are still used and sent to warehouse for storage. The barcode is scanned upon filing or retrieval and used for tracking the documents (who checked out the file and when it was checked back into the storage facility). Barcodes can streamline tracking the type of work done and the time the records were used and by which employee. With the recent innovative technologies being applied to cell phones, the phone can be used to read barcodes without the need for special scanning devices. Of course, as applications were recently developed to allow online searching for a retail product, where the barcode identifies and then shows the price of the product from various retailers,
EXHIBIT A: SAMPLE ROUTER
applications for the phone barcode-scanning technology is already here and will soon expand into the office and other operational procedures. Implementing automation does not have to be expensive; barcoding technology is still viable, cheap, undergoing a huge comeback, and powerful in managing documents, in expediting and improving accuracy of encoding and input procedures, and in allowing smooth information and workflow solutions for various industries. In automating processes, CPAs should keep barcodes in mind as a simple solution and as a means to facilitate document management, data coding and capturing, storing, querying, filing, retrieving and many other applications as needed by CPAs and their clients. FOOTNOTES 1. Bloomberg BusinessWeek “Bar Codes Ride Again - on Mobile Phones,” February 4, 2010. 2. www.businessweek.com/technology/content/feb2010/tc2010024_192595.htm. 3. These special fonts are added to Windows folder on main drive and in the “fonts” sub-folder (e.g., C:\Windows\Fonts). 4. Routers or travelers printed by engineering and designers are documents, including bill of materials, along with specific instructions and specifications detailing sequential phases and job steps to be followed in the shop. (See Exhibit A for a sample router produced with Excel® spreadsheet.) 5. Other types of operations and applications may require label printers or barcode scanning devices if not available with the application itself (e.g., timekeeping, tracking inventory gadgets, and other data collection and communication systems). ■
Rabih Zeidan, Ph.D., CPA, is an assistant professor of accounting at Texas A&M University-Corpus Christi. Prior to earning his
Ph.D. from the University of Houston, Zeidan worked as chief financial officer for KMC, Inc. (turbo-machinery manufacturing) and had 10 years of experience in healthcare financial management. Zeidan is a member of the Texas Society of CPAs and a fellow of the Healthcare Financial Management Association. He may be contacted at Rabih.Zeidan@tamucc.edu.
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CPE Article By George Frankel, MBA, J.D., LL.M., CPA
SEPARATELY SPOUSES IN COMMUNITY PROPERTY STATES MUST ALLOCATE COMMUNITY INCOME WHEN FILING SEPARATELY
Married taxpayers generally save taxes by filing jointly rather than separately. However, when married taxpayers are separated or estranged, they should file separately to prevent joint and several liability on a joint return. Curriculum: Tax Level: Intermediate Designed For: Tax Practitioners Objectives: To provide practitioners with an understanding of applying basic community property and separate property rules to married individuals filing separately, and to same-sex married couples. Key Topics: Community property, separate property, same-sex married couples, separate returns Prerequisites: None Advanced Preparation: None
This article addresses how married spouses (and registered domestic partners, or RDPs, and same-sex married couples in California and Washington) who file separate returns in community property states must allocate items of income and deductions between them. In community property states, married taxpayers combine their separate and community income on a joint return. Married taxpayers filing separately report not only their separate income, but also half of the community income. However, if the requirements of Internal Revenue Code (IRC) Section 66 are met, a spouse reports only his/her income and does not report half of the community income earned by the other spouse. The benefits of Section 66 are not available to an RDP or to California and Washington same-sex married individuals. Married taxpayers who are not divorced or legally separated generally save taxes by filing jointly, but estranged spouses should file separately. A married taxpayer who is not legally separated under a decree of divorce or separate maintenance can file either a joint return or separate return whether living together or apart.1 Todayâ€™sCPA
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A spouse who is married may be considered as unmarried and can file as head of household if certain requirements are met.2 Spouses who file jointly combine their separate and community income on a joint return. Taxpayers should compute their tax first on a joint return and then on separate returns to determine which filing status results in less tax. In most cases, married taxpayers filing jointly pay less tax than they would if they each filed separately. A taxpayer who files separately loses significant benefits. He/she:
• cannot use the standard deduction and must itemize deductions if the other spouse itemizes deductions; • cannot take the child and dependent care expenses in most cases; • cannot exclude any interest income from qualified U.S. savings bonds for higher education expenses; • cannot take the earned income credit; • cannot take the credit for the elderly or disabled unless living apart from his/her spouse all year; • may have to include in income more of any Social Security benefits received during the year than on a joint return; • cannot deduct interest paid on a qualified student loan; • cannot take the credit for higher education expenses (American opportunity, Hope and lifetime learning credits), the deduction for student loan interest, or the tuition and fees deduction; • may have a smaller child tax credit than on a joint return; • cannot take the exclusion or credit for adoption expenses in most cases; • qualifies for a lower first-time homebuyer credit; and • cannot roll over amounts from an eligible retirement plan (other than a Roth IRA or designated Roth account) into a Roth IRA if living with spouse.
In addition: the capital loss deduction is limited to $1,500 (instead of $3,000 on a joint return); the basic standard deduction, if allowable, is half of that allowed a joint return filer; and the income limits that reduce the child tax credit, retirement savings contributions credit, itemized deductions, and the deduction for personal exemptions are half of the limits allowed a joint return filer.3 TAXPAYERS SHOULD FILE SEPARATELY IN CASES OF MARITAL DISCORD In cases of marital discord, it is wise to file separately to avoid liability for taxes owed by the other spouse. A taxpayer who files a joint return is jointly and severally liable for any tax, related penalties, interest arising out of that return, and any later determined deficiency.4 Joint and several liability means the Internal Revenue Service (IRS) is entitled to collect taxes due from either or both spouses. A spouse is liable even if the other spouse obtains full or partial relief from the liability.5 If the taxpayer files separately, he/she is responsible only for the tax due on his/her own tax return. Section 6015 provides the following exceptions to joint and several liability: 1) election for separate liability;6 2) innocent spouse relief;7 3) and equitable relief.8 COMMUNITY PROPERTY LAW A taxpayer’s rights to community property and income are determined by the laws of the state in which the taxpayer is “domiciled.”9 The taxation of those rights, however, is determined Today’sCPA
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by federal law.10 Where the taxpayer is domiciled is mainly a question of his/her intent. “Domicile” is defined as “a permanent legal home that the taxpayer intends to use for an indefinite or unlimited period, and to which, when absent, the taxpayer intends to return.”11 The community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.12 Alaska provides for an elective community property system.13 The community property laws differ from state to state. To determine the treatment of any specific item of income, the taxpayer must consult the law of the state in which he/she is domiciled. COMMUNITY PROPERTY DEFINED The general rule of community property law is that all property acquired during the marriage (or until the marriage is deemed terminated) by husband, wife or both, is presumed to be community property.14 Even if one spouse takes title to the property in his/her name alone, the property is presumed to be community property. The date of acquisition and the source of funds determine whether the property is separate or community property.15 Any property that cannot be identified as separate property is presumed to be community property. In most states, the spouses can opt out of the community property rules through written agreements that define the character of the property acquired during the marriage as separate or community property. Therefore, the spouses can agree to convert separate to community property or community property to separate property. Federal law recognizes the validity of these agreements for tax purposes.16 The taxpayer should be cautious, however, since such a conversion might result in a federal gift tax. If the taxpayer commingles his/her separate property with community property, the separate property might be converted into a community asset, depending on the law of the jurisdiction. For example, if the taxpayer receives dividends from separate property and deposits those dividends into a bank account held as community property, the taxpayer has commingled his/her assets and may have converted the status of the property. Generally, the ownership of movable property is determined by the state where the married couple was domiciled at the time of acquisition. For example, if a married couple acquires a car while domiciled in California and then moves to a common law state, the car would be community property and the laws of California would apply to it.17 Generally, the character of real property is determined by the law of the jurisdiction where the property is located. Complications arise when taxpayers move, property is moved, property is exchanged, or taxpayers use community funds to purchase property in another state. Income of the community is considered community property. Community income includes income from the personal efforts of either spouse performed during marriage, as well as income generated by community assets such as interest, rents and dividends.18 SEPARATE PROPERTY DEFINED The definition of separate property also varies from state to continued on next page
CPE Article continued from page 37
state. In most community property states, separate property is defined as property acquired by a husband or a wife before marriage or by gift, bequest, devise or descent.19 Money earned while domiciled in a common law state is generally separate property. Property purchased with separate funds or acquired in exchange for separate property during the marriage is considered separate property.20 Property acquired based on the credit of one of the spouses alone is considered separate property.21 Spouses may generally agree to convert community property to separate property by agreement. If part of the property is purchased with both separate and community funds, the part purchased with separate funds is separate property. In those states following the “Texas rule” (Texas, Idaho, Louisiana and Wisconsin), income from separate property is generally community property. In those states following the “California rule” (Arizona, California, Nevada, New Mexico and Washington), income from separate property remains separate. In some states, the income earned by a spouse after separation but before a final judgment or an interlocutory decree of divorce is entered is separate property.22 In other states, the income is community property. Complicated issues arise with respect to the allocation of appreciation on separate property. Some states treat the appreciation attributable to the efforts of one spouse as community property. Other states allocate a reasonable rate of return on the separate property to separate income and the remainder of the appreciation to community income. HOW COMMUNITY INCOME IS REPORTED ON SEPARATE RETURNS In Poe v. Seaborne,23 the Supreme Court made it clear that married taxpayers filing separately must report their separate income and half of their community income on their separate returns regardless of which spouse earned the income. Deductible expenses that are paid from community property funds for a community property asset are presumed to be paid half by each spouse. Deductions paid from the separate property funds of a particular spouse are deductible by that spouse. The taxpayer can also claim credit for half the income tax withheld from community income, regardless of which spouse actually earned the income. Taxpayers filing a joint return cannot take a deduction for alimony.24 If the taxpayer files separately, he/she can qualify for the alimony deduction; however, the other spouse must include the alimony in income. Payments that may otherwise qualify as alimony are not deductible by the payer if they are the recipient spouse’s part of community income. They are deductible by the payer as alimony and taxable to the recipient spouse only to the extent they are more than that spouse’s part of community income. EXAMPLE Peter lives in Texas, a community property state. Peter and Stella are married, but do not meet the requirements of Section 66(a) for spouses living apart, discussed below. Under a written agreement, Peter pays Stella $12,000 of his $20,000 total yearly community 38
income. Stella receives no other community income. Under Texas law, earnings of a spouse living separately and apart from the other spouse continue as community property. Peter and Stella each must report $10,000 of the total community income. In addition, Stella must report $2,000 as alimony received. Peter can deduct $2,000 as alimony paid.25 Registered Domestic Partnerships and California and Washington same-sex married couples must report community income in the same manner as opposite-sex spouses. Community property law developed within the context of marriage and originally applied only to spouses. Prior to passage of the Defense of Marriage Act, marital status was determined by state law.26 However, the Defense of Marriage Act of 1996 defined marriage as a “legal union between one man and one woman as husband and wife.”27 For federal tax purposes, the word “spouse” refers only to a person of the opposite sex who is a husband or a wife.28 Consequently, each partner in a same-sex marriage must file a separate federal income tax return as “single” or, if applicable, as “head of household.” In 2010, the IRS announced that it recognizes the community property rights granted by states to same-sex couples in stateregistered domestic partnerships (RDPs), civil unions and same-sex marriages in the same manner as it does for oppositesex married couples.29 It recognized the principle that federal law follows state property law definitions of property ownership.30 Currently, the law applies to registered domestic partners who are domiciled in Nevada, Washington or California and to individuals in California and Washington who, for state law purposes, are married to an individual of the same sex. Currently, these are the only states that both legally recognize same-sex couples and grant community property rights. In these states, RDPs will be treated the same as opposite sex couples: on separate returns, each partner in an RDP must report one-half of the combined income from personal services and from community property assets on his/ her individual income tax return and the full amount of his/her separate income. Like opposite-sex married couples, RDPs and same-sex married partners can opt out of community property rules by an agreement to convert certain property from separate to community property or vice-versa. The taxpayer is entitled to a credit for half of the income tax withheld on his/her partner’s wages. Federal gift tax does not apply. Vesting of half of the taxpayer’s earnings in his/her partner is not considered a transfer of property for federal gift tax purposes under Section 2501.31 SPOUSES LIVING APART In cases of marital discord, spouses who are living apart generally file separate returns. If they meet the requirements of Section 66(a), the spouses do not report half the community income earned by the other spouse. Section 66(a) does not apply to RDPs and California or Washington married same-sex individuals. Section 66(a) applies if all of the following requirements are satisfied: Today’sCPA
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(1) The spouses are married to each other at any time during the calendar year;32 (2) The spouses live apart at all times during the calendar year;33 (3) The spouses do not file a joint return;34 (4) One or both spouses have earned income that is community income for the calendar year;35 and (5) No portion of such earned income is transferred between such spouses during the year.36 Unlike the other provisions under Section 66, Section 66(a) does not permit inclusion on an item-by-item basis.37 The spouses must maintain separate residences to be “living apart.”38 However, if they maintain separate residences due to a temporary absence, they are not considered to be living apart. For example, a spouse stationed overseas in the military is considered to be absent temporarily and is not considered to be living apart.39 If the taxpayer meets the above criteria, the following items of income and the deductions properly allocable to that income are divided between the spouses in accordance with the rules of Section 879. Section 879(a) provides that: (1) Earned income (other than trade or business or partnership income) is treated as the income of the spouse who performed the services. Earned income includes wages, salaries, professional fees and other pay for personal services; (2) Trade or business income and related deductions are treated as those of the spouse carrying on the trade or business; (3) Partnership distributive share income is attributed to the spouse who is in fact the partner; (4) Community income derived from separate property, as determined under state law, is taxed to the owner of the property. This rule overrides the “Texas” rule that income from separate property is treated as community income; (5) All other community income, such as dividends, rents, royalties, gains or earnings of a minor child, are taxed under the community property laws of the state; (6) Social Security and equivalent railroad retirement benefits are the income of the spouse who receives the benefits.40 EXAMPLE William and Tracy are both domiciled in Texas. They were married throughout 2012, but did not live together at any time during the year. They did not transfer any of their earned income between themselves. They both filed married/separate returns. William did not take part in the management or control of Tracy’s interior design business. Tracy was not a member of the ABC Partnership. For 2012, their incomes were as follows: FIGURE 1 Wages
Interior design business – Schedule C ABC Partnership income Dividends from Blue Corporation owned as separate property by William
8,000 12,000 3,000
Dividends from Green Corporation owned as separate property by Tracy Interest on First California Bank account owned as community property Totals
1,000 1,200 $66,200
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Under the community property laws of Texas, all income derived from property held separately by either spouse is to be treated as community income and treated as belonging one-half to each spouse. All income earned by either spouse is considered to be community income, and one-half of this income is considered to belong to the other spouse. Absent the provisions of Section 66(a), William and Tracy would each report $74,200, half of the community income of $148,400 ($66,200 + $82,200) on their separate returns. However, since they meet all the requirements of Section 66(a), they must report their income pursuant to the rules of Section 879(a). They each report on separate returns their own income from the wages, Schedule C income, partnership income and dividends. Since the bank account is community property, the interest on State A bank is divided equally between them.41 William reports $66,200 and Tracy reports $82,200 on separate returns. If William and Tracy were RDPs or a same-sex married couple in California, Section 66(a) would not apply and each would report $74,200. OTHER EXCEPTIONS TO REPORTING HALF THE COMMUNITY INCOME Section 66 also provides certain other exceptions to the rule that married individuals domiciled in a community property state must report half of the total community income on separate returns. These exceptions are not available to RDPs or California and Washington same-sex couples. Section 66(b) provides that if a taxpayer acts as if he/she is solely entitled to the community income, and fails to timely notify the taxpayer’s spouse of the nature and amount of the income, the IRS may deny any benefit of community property laws to that taxpayer. The item of community income will be included, in its entirety, in the gross income of the spouse to whom the IRS denied the benefits. Section 66(b) is not a relief provision, but rather, gives the IRS the discretion to disallow one spouse from taking advantage of the community property laws to the detriment of the other spouse. INNOCENT SPOUSE RELIEF Under Section 66(c), when a spouse inadvertently fails to include an item of community income on his/her separate tax return, he/she can request innocent spouse relief. The regulations refer to this provision as traditional relief. The following conditions must be met to qualify for traditional relief: (1) The individual does not file a joint return for the tax year; (2) The individual does not include an item of community income in gross income that is properly included under the allocation rules of Section 879(a), discussed above, as the income of the “nonrequesting spouse.” A “requesting spouse” is the spouse who requests relief and doesn’t file a joint return with the other spouse (“nonrequesting spouse”).43 (3) The individual establishes that he/she did not know of, and had no reason to know of, that item of community income. A spouse has knowledge or reason to know of excluded community income if he/she either actually knew of the understatement or if a reasonable person in similar circumstances would have known of the understatement;44 and continued on next page
CPE Article continued from page 39
(4) Taking into account all facts and circumstances, it is inequitable to include that item of community income in the individual’s gross income. If the spouse meets all of these requirements, the item is not included in the gross income of the requesting spouse and instead is included in the gross income of the nonrequesting spouse.45 EQUITABLE RELIEF A taxpayer who does not meet all the requirements for traditional relief can still obtain what the regulations refer to as equitable relief. Equitable relief is available if, taking into account all the facts and circumstances, it is inequitable to hold the taxpayer liable. The criteria for equitable relief are detailed in Rev. Proc. 2003-61. Relief applies only to any unpaid tax or deficiency attributable to items of omitted income arising from community income attributable to the nonrequesting spouse. The taxpayer must file Form 8857 (Request for Innocent Spouse Relief) to request relief from the federal income tax liability resulting from the operation of community property law under either the traditional or equitable relief rules within specified time limits. HEEDING THE REASONS TO FILE SEPARATELY Married taxpayers generally save taxes by filing jointly. However, if they are separated or estranged, they should file separate tax returns to avoid the joint and several liability rules. RDPs and same-sex married couples in California and Washington must file separate federal returns. If married taxpayers who file separately meet the requirements of 66(a) for living apart, they will not report half of the community income: each taxpayer will report only his/ her own income. They may also qualify for innocent spouse or equitable relief. Section 66(a), innocent spouse relief, and equitable relief do not apply to RDPs and to California and Washington same-sex married couples.
FOOTNOTES 1. I.R.C. 6013(a), Reg. § 1.6013-4(a). 2. I.R.C. § 2(b)(1). 3. IRS Pub. No. 555, (Dec. 2010) p. 9. 4. I.R.C. §6013(d)(3); Reg. § 1.6013-4(b). 5. Kroh v. Comr., 98 T.C. 383 (1992) 6. I.R.C. § 6015(c). 7. I.R.C. § 6015(b). 8. I.R.C. § 6015(f). 9. IRS Pub No. 555, (Dec. 2010), p. 2. 10. Burnet, David v. Henry Harmel, 11 AFTR 1085, 287 US 103, 77 L Ed 199, 3 USTC ¶990 (US, 11/7/1932). 11. IRS Pub No. 555, (Dec. 2010), p. 2. 12. IRS Pub No. 555, (2010), p.1. 13. Alaska Stat. Sec. 34.77.010 et. seq. (2004). 14. See for example, Wash. Rev. Code Sec 26.16.030(6). 15. For example, see Martin v. Pritchard, 52 Cal. App. 720, 199 P. 846 (1921). 16. Rev. Rul. 77-359, 1977-2 C.B. 24. 17. Cal. Fam. Code Sec 760 (1994). 18. Estate of Miles, 72 Cal. App. 2d 336, 164 P.2d 546 (1945). 19. Cal. Fam. Code 770(a) (1994). 20. Marriage of Knickerbocker, 43. Cal. App. 3d 1039, 118 Cal. Rptr. 232 (1974). 21. See Cal. Fam. Code Sec 771(a) (2003). 22. 9 AFTR 576 (51 S. Ct. 58), 11/24/1930. 23. I.R.C. § 215. 24. IRS Pub. 555 (2010), p. 5. 25. IRS Pub. No 504 (2009) p. 3. 26. Defense of Marriage Act, P.L. 104-199. 27. IRS Pub. 555 (2010), p. 2. 28. Chief Counsel Advice 201021050. 29. P.L.R. 2010-21-048 (May 28, 2010). U.S. v. Mitchell, 403 U.S. 190 (1971), Burnet v. Hamel, 287 U.S. 103 (1932). 30. P.L.R. 2010-21-048 (May 28, 2010). Poe v. Seaborn, supra note xix. 31. I.R.C. § 66(a)(1).
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32. I.R.C. § 66(a)(2)(a). 33. I.R.C. § 66(a)(2)(b). 34. I.R.C. § 66(a)(3). 35. I.R.C. § 66(a)(4).
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38. Reg. § 1.66-2(d), Ex 1.
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40. I.R.C. § 879(a)(4).
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37. Reg. § 1.6015-3(b). 39. I.R.C. § 879(a), (c); Reg. § 1.879-1(a). 41. Hardy, Cathy Miller v. Com., 181 F3d 1002, 99-2 USTC ¶50643, 84 AFTR 2d 995015, (1999, CA9). 42. Reg. § 1.66-4(g)(1). 43. Reg. § 1.66-4(a)(2). 44. Reg. §1.66-4(j)(1).
45. I.R.C. § 66(c); Reg. § 1.66-4(b).
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CPE Quiz Today’s CPA offers the self-study exam below for readers to earn one hour of continuing professional education credit. The questions are based on technical information from the preceding article. Mail the completed test by August 31, 2013, to TSCPA for grading. If you score 70 or better, you will receive a certificate verifying you have earned one hour of CPE credit – granted as of the date the test arrived in the TSCPA office – in accordance with the rules of the Texas State Board of Public Accountancy (TSBPA). If you score below 70, you will receive a letter with your grade. The answers for this exam will be posted in the next issue of Today’s CPA. PARTICIPATION EVALUATION (Please check one.) 5=excellent 4=good 3=average 2=below average 1=poor 1. The authors’ knowledge of the subject is: 5__ 4__ 3__ 2__ 1__. 2. The comprehensiveness of the article is: 5__ 4__ 3__ 2__ 1__. 3. The article and exam were well suited to my background, education and experience: 5__ 4__ 3__ 2__ 1__. 4. My overall rating of this self-study exam is: 5__ 4__ 3__ 2__ 1__. 5. It took me___hours and___minutes to study the article and take the exam. Name _______________________________ Company/Firm________________________ Address (Where certificate should be mailed) ___________________________________ City/State/ZIP_________________________ Enclosed is my check for: ___ $10 (TSCPA member) ___ $20 (non-member) Please make checks payable to The Texas Society of CPAs. Signature____________________________ TSCPA Membership No._______________ After completing the exam, please mail this page (photocopies accepted) along with your check to: Today’s CPA; Self-Study Exam: TSCPA CPE Foundation Inc.; 14651 Dallas Parkway, Suite 700; Dallas, Texas 75254-7408. TSBPA Registered Sponsor #260.
Married Filing Separately: Spouses in Community Property States Must Allocate Community Income When Filing Separately BY GEORGE FRANKEL, MBA, J.D., LL.M., CPA
1 Peter and Sally are married filing separately and are domiciled in California. They live in the same house. For 2012, Peter’s salary is $50,000 and Sally’s salary is $80,000. Sally inherited Intel stock from her mother which she holds as separate property. Sally received $5000 of dividends from the Intel stock in 2012. Peter received a gift of Westinghouse stock from his grandfather which is held as his separate property. Peter received a dividend of $3000 from the Westinghouse stock in 2012. What is Sally’s gross income for 2012?
6 Susan and Chris are both domiciled in California. They both file married/separate returns. For 2012, their income is as follows: Susan’s salary $50,000; Chris’s salary $60,000; interest income from a bank account owned as Susan’s separate property $2000; dividends from Seymour Corp. stock owned as community property $3000; dividends from Ryan Corp. stock owned as Chris’s separate property $1000. If Susan and Chris qualify for Section 66(a), what is Chris’s gross income for 2012?
A. $85,000 B. $70,000 C. $67,250 D. $71,500
A. $62,500 B. $57,500 C. $58,000 D. $56,000
2 Warren and Pearl are married and live in California. They file separate returns. They do not qualify for Section 66(a). For 2012, Warren’s salary is $70,000 and $6000 was withheld for federal income tax. How much can Pearl claim as a credit for federal taxes on her separate tax return?
7 Harry and Pat are domiciled in Texas. They each filed married/separate returns for 2012. Pat has a landscaping business, which Harry did not take part in. Harry is a member of the XYZ Partnership, but Pat is not a member. For 2012, their incomes were as follows: Harry’s salary, $40,000; Pat’s salary, $50,000; Pat’s income from the landscaping business, $20,000; XYZ partnership income, $25,000; interest income from a bank account owned as Pat’s separate property, $3000; dividends from Chrysler Corp. stock owned as community property, $2000; dividends from HP stock owned as Harry’s separate property, $2000. How much income does Pat report on her separate return if Harry and Pat meet the requirements of Section 66(a)?
A. $6000 B. $3000 C. 0 D. None of the above
3 Which of the following tax benefits is generally available to taxpayers filing separately? A. B. C. D.
American Opportunity Credit Earned Income Credit Child and Dependent Care Credit Deduction for contributions to a traditional IRA
4 Warren and Sharon are married and live in Texas. They do not meet the requirements of Section 66(a). Warren transfers to Sharon $18,000 of his $30,000 salary in accord with a written separation agreement. What amount must Sharon report as alimony income? A. $9000 B. $3000 C. $15,000 D. $18,000
5 All of the following are true with respect to Section 66(a) except: A. The spouses must be married to each other at any time during the calendar year. B. One or both spouses have earned income that is community income for the calendar year. C. The spouses live apart at all times during the calendar year. D. The taxpayer can choose which items of income to include under Section 66(a) on an item-by-item basis.
A. $71,000 B. $75,000 C. $69,000 D. $74,000
8 Same facts as Question 7, except assume that Harry and Pat do not qualify for Section 66(a) and live in Texas. A. $71,000 B. $75,000 C. $69,000 D. $74,000
9 A taxpayer is jointly and severally liable for federal income taxes if he: A. B. C. D.
files a separate return. qualifies for innocent spouse relief. files a joint return. qualifies for equitable relief.
10 Which of the following states is not a community property state? A. Idaho B. Louisiana C. Wisconsin D. Oklahoma
Answers to last issue’s self-study exam: 1. a. 2. d. 3. c. 4. a. 5. d. 6. e. 7. a. 8. c. 9. a. 10. a. Today’sCPA
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