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- Written by: T. Steel Rose, CPA
To get to the essence of crowdfunding for CPAs I talked with Sherwood Neiss, the entrepreneur, who pioneered the legislation, Sara Hanks, a due diligence attorney, and Richard Salute, the CPA who may have the most relevant experience about this new practice area for CPAs.
Equity crowdfunding was made possible by the JOBS Act signed into law in April to allow individuals to buy equity stakes in emerging growth companies, who will be able to raise up to $1,000,000. The SEC has concerns about fraud now that raising capital from the general public will become legal in 2013, the first time in 80 years. Therefore, audits by CPAs are required for capital raised over $500,000. Reviews are required for capital raised over $100,000, up to $500,000.
From Sherwood Neiss, I learned that the JOBS Act rules are expected to remain largely intact despite the burden to the SEC. Neiss is one of three entrepreneurs that literally provoked an Act of Congress to obtain SEC exemptions for these public capital formations of under $1,000,000 on websites.
“The review area will be a boon to CPAs who prepare and review financials for integrity and comprehensiveness,” said Neiss.
Neiss expressed the same consternation as other people I talked with who are entrepreneurs. “How are CPAs going to do an audit for a startup since it is hypothetical?” he asked. “The CPA industry will provide guidelines,” he said.
In my discussion with CPAs, an audit remains an audit, as does a review. “There is no way to modify how you perform attestation,” Neiss believes. “The onus will be on the funder that the financials have been stated accurately. They will need the income statement, a balance sheet and cash flow statement.” It is Neiss’ opinion that, “The CPAs who want to get involved in these will have to find a way to keep the fees lower, to make more, later. This is a brilliant add-on component. It is essentially a private offering of public shares.”
Companies can be getting ready right now. “Building a business plan and a social network with an executive summary of financials can occur, but we all must wait on the SEC to finalize rules,” Neiss advised. As the crowdfunding framework now exists, Neiss stated, “The investment opportunity is presented by the entrepreneur. They must hit 100% of their [capital raising] target or they don’t get the money.” As to how much equity they can give up, “There is no set standard,” Neiss said. Determining valuations is another area for CPAs with valuation credentials to play a role.
Neiss was motivated to do this with two other entrepreneurs because, “we all tried to raise capital after the 2008 meltdown and found out that it wasn’t there,” Neiss lamented. “Five years ago you could not do this because Internet was not providing the sunlight to this,” Neiss said referring to Kickstarter.com, which is a platform used to raise money for products and intangibles but not equity. He recommended reviewing crowdcube.com, a site where equity is offered successfully, operating in the UK.
The players in the crowdfunding arena are similar to the roles played at investment banks: The issuers offer equity in their companies. The investors provide the capital. The CPAs provide some assurance. The new wrinkle is the website portals and other intermediaries who provide due diligence and other services. Each player will have to comply with important rules to protect investors and satisfy the SEC.
Companies that help issuers and portals with the required due diligence are already forming. An early pioneer is Sara Hanks, CEO of CrowdCheck. A securities lawyer for 30 years, Hanks was drawn to crowdfunding based on her interest in the need for “micro-due diligence for micro IPOs.”
“CPAs are going to play such an important role, and we are happy to help them,” said Hanks. “In the statute, there is a requirement for a background check and a securities regulatory check for the portals which is not a defined term of the SEC. The statute has to define ‘background check’ as well. The one thing people have to bear in mind is that the SEC has to issue rules and register the portals.”
Hanks described the CrowdCheck service as one that will help entrepreneurs put together, “the disclosure package of some kind to be posted on the portal and sent to the SEC.” Hanks helped me to get my head around all of the fees involved. “There is the disclosure process, the CPA, the escrow and some legal fees, possibly; as well as the merchant processing fees to be passed along to the issuers. There will also be portal fees, and PayPal fees,” said Hanks. “As it grows, these amounts will go down.” CrowdCheck will be looking for CPAs to provide audit services. “Some of these will be super startups, only a few weeks old,” said Hanks. “The SEC needs to provide some guidance to provide what they will audit.”
Realizing that the crowdfunding enthusiasts are not well versed concerning what it takes to provide the level of assurance that the SEC requires, I talked to CPA Richard Salute of JH Cohn. Salute has experience auditing SPACs, which are similar because SPACs are special purpose offerings raising blind pools of capital for issuers to then find businesses to acquire.
“The SPAC may only have founder stock, or founder stock and warrants,” explained Salute. “The financial statements, even though they are zeros, the offering is audited in accordance with GAAS.”
“Standards already exist,” said Salute. “The challenge that you have is an audit is an audit is an audit. These are risk based activities that require work even when there are narrow financial statements and internal controls. We should celebrate the standards, not reduce them.”
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- Written by: Raul O. Serrano, Jr.
It is hard to believe that in a fast pace world run by computers, where seconds are considered slow, that we still would not be able to get taxpayers’ records from the IRS in a timely manner. We all have experienced the long hold on telephone calls before an IRS employee actually answers the line, or the 45 days or more turn-around time on responses. But, that is no longer the case. Finally, the IRS has made available e-service products through their website, which makes getting taxpayers’ transcripts, answer notices and complex problem resolutions with the touch of the keyboard.
In order to use the e-service program, you must first register with the IRS and provide taxpayer information. The application process is started from the e-services home page. You should complete all applicable portions of the online form and submit it to the IRS for processing. Once the information is verified by using IRS taxpayer records, you will be asked to create a username and password.
The registration is not difficult, and once verified, you will enjoy the benefits of getting taxpayers’ records and solving IRS problems a lot quicker than the alternative.
What is E-Service?
E-Service is designed to make it easier for individuals or organizations, who use or process IRS data, to conduct business with the IRS. The E-Service Program allows you to perform tasks using the Internet that previously had to be done through correspondence or over the telephone.
Who can use the e-service?
All tax professionals are eligible to use the e-services for registration and online e-file application. In addition, if you are an Electronic Return Originator (ERO), which most of us are, and if you file 5 or more accepted returns, you can use the most useful products, such as:
1. Disclosure Authorization (DA);
2. Electronic Account Resolution (EAR);
3. Transcript Delivery System (TDS).
NOTE: Effective as of November 1, 2007, all Circular 230 practitioners who qualify as Attorneys, CPAs or Enrolled Agents, have unlimited access to the incentive products listed above whether they e-file their clients returns or not.
Disclosure Authorization (DA) is an e-service product that allows you to complete a taxpayer’s authorization to inspect and receive confidential tax data and/or represent the taxpayer before the IRS. The DA allows you to submit the complete authorization to the IRS using the Internet. You are required to get a completed and executed Form 2848 or Form 8821, Taxpayer Information Authorization, if applicable, and keep same in the client’s file. Also, you need the taxpayer’s information, such as date of birth and prior year’s adjusted gross income.
Electronic Account Resolution (EAR) is an online service for practitioners to initiate an inquiry about a tax account for which they have an unmodified Form 2848, Power of Attorney and Third Party Representative, recorded on the Centralized Authorization File (CAF). This includes those entered through the e-service Disclosure Authorization Product.
The following types of account inquiries are available thru EAR:
1. Account Problems Inquiry allows a third-party to submit an inquiry related to an account problem.
2. Complex Inquiry allows a third-party to submit an inquiry related to refunds returned as undeliverable, destroyed refund repayments, erroneous refunds, and refund offsets.
3. Notice of Inquiry allows a third-party to submit an inquiry related to an IRS notice received through the mail. EXCEPTION: CP-2000 inquiries cannot be submitted using EAR.
4. Installment Agreement Inquiry allows a third-party to submit an inquiry related to a taxpayer’s installment agreement with the IRS.
5. Payment Tracer Inquiry allows a third-party to request the trace of a missing or misapplied payment.
6. Multiple Inquiries allow a third-party to complete and submit multiple inquiry forms for the same taxpayer.
7. Follow-up Inquiry allows a third-party to submit additional information on a previously submitted inquiry.
Also, with any of the above submissions, you will be provided with an EAR Tracking Number in the acknowledgment page at the end of the inquiry. A tracking number is good for 21 days after the response is placed in the Secure Object Repository (SOR). You can use this tracking number to check on your inquiry. It has been my experience that the responses are within 3 to 5 business days of the submission.
Transcript Delivery Systems (TDS) allows authorized users to request federal tax information from the IRS records on behalf of their taxpayer clients. You can request account transcripts on 1040s, 1120s, civil penalties, wage and income transcripts, and others.
All of the transcripts are available immediately upon successful login.
My office has used the E-Service Program and finds the electronic account resolution very helpful. Although there is no guarantee that every problem will be solved, the response time of 3 to 5 business days from the submission is by far a lot better than the 45-day waiting period. Further, being able to obtain the IRS transcripts immediately upon login is invaluable.
If you should want more information, please log onto www.irs.gov and go to tax professionals and then e-services for tax pros.
Raul O. Serrano, Jr., practices representation before the IRS on tax controversies and is a frequent speaker on the subject. Mr. Serrano is presently Vice-Chair of the FICPA’s Federal Taxation Committee. He is a Past President of the FICPA’s Gold Coast Chapter and moderates a monthly tax roundtable on behalf of the Chapter. He was previously featured as one of the top 50 IRS Representation Practitioners by CPA Magazine.
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- Written by: Gary Adamson, CPA
There is a constant topic of conversation both inside firms and at almost every conference. It is the age-old question of partner compensation and “how do you do it”. As our firm grew, we evolved from everyone is equal, to the “slip of paper” approach, to a more goal driven, performance based system. Every firm is a little bit different but the issues surrounding how you split the pie are pretty consistent.
How you choose to solve the partner comp question in your firm depends on a number of things including size, number of partners and where you are on the firm age/evolution spectrum. There is a movement to more performance and goal driven systems even in smaller practices, and moving away from “we’re all the same”. We all know that the reality is that we’re not.
There is also a movement away from formula based systems. It is very difficult if not impossible to find the mathematical equation that will consistently result in a fair outcome. There are just too many variables that don’t fit well in a formula.
Regardless of the details of your plan, several rules or themes will hold true:
1. Judgment is always a critical part of the plan. Even in a formula based system, decisions are made on which criteria get measured and the relative weight of each one.
2. You are working with tangibles and intangibles. Tangibles are the things that we all measure like production, billings, business development, etc. Intangibles are the human factors and more difficult to measure such as leadership and team development.
3. No two partners are alike. You should consider different performance measures and goals based on the individual’s particular contributions to the firm.
The following checklist is intended to provide a framework to get you thinking and to help you review your current process. It is not intended to be all inclusive or to fit you perfectly. Every firm truly is different.
- What target percentage of total comp is salary (draw) vs. bonus?
- How much is at risk to the performance criteria? Is total compensation at risk or just the bonus? Consider how much of a potential roller coaster ride that you want.
- Interest on capital, if relevant.
- Partner goal setting and results as a part of the process.
- Tangible criteria vs. intangible. How much of both does your plan incorporate? Remember that a significant dose of judgment is involved in both.
- Firm goals for the year are integrated with the comp plan? Knowing what the firm goals are and how each partner makes a contribution is key.
- Is there a discretionary or non-assigned pool of money that can be used by the Managing Partner or partner group to reward exceptional performance or to make adjustments where needed? This really gets to the question of how much the tangible vs. the intangible criteria drive your system.
Some of the more common performance criteria are:
- New business development – new clients.
- New business development – up sells, cross sells to existing clients.
- Firm leadership and management.
- Staff mentoring and development.
- “Good of the firm” activities.
- Working capital consumption (WIP and A/R management).
- Job profitability and realization.
- Staff utilization.
- Book of business. Be careful putting too much weight here.
- Charge hours. Be careful putting too much weight here.
- Specific personal or firm goals.
- Successful transition of client responsibilities for a partner nearing retirement.
- Movement of client responsibilities from one partner to another. The comp plan should encourage and enable this to help keep the firm’s rainmakers free and to assure that the client is served by the best partner and team.
What is your process? This includes who is responsible and the timeline. An abbreviated example of a system in a firm with goal setting and a compensation committee might look like:
- The firm establishes overall goals for the year.
- The Managing Partner establishes goals with each partner, integrated with the firm goals and monitors performance with each partner during the year.
- The MP and each partner meet at year end to review achievement of goals and summarize performance.
- The MP makes a recommendation of the year end bonus allocation to the Compensation Committee based on each partner’s performance and the judgment of the MP.
- The Compensation Committee reviews and adjusts, if necessary, the MP recommendation.
- Salaries (draws) are set for the coming year by the MP and Compensation Committee.
- The Compensation Committee or governing board is responsible for a similar process with the MP.
The ultimate goal is to find a fair allocation of firm profits among the partner group. One size clearly does not fit all firms or partners and, as your firm evolves, your partner compensation process needs to evolve along with it.
Gary Adamson is the President of Adamson Advisory, specializing in practice management consulting for CPA firms. He is an Indiana University graduate and has extensive hands on experience as the recent managing partner of a top 200 CPA firm. He can be reached at 765-488-0691 or
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- Written by: Robert E. McKenzie, JD
As the political season enters a fever pitch, some misguided candidates are calling for the abolishment of the IRS. Although the political rhetoric draws applause it ignores one uncontested fact: the U.S. government needs revenue to provide services to the public. Someone has to pay for our national defense, Social Security, Medicare and our highways. In a recent speech John Koskinen, Commissioner of IRS, affirmed that logic by stating, “Somebody has to collect the money and somebody has to make sure when you fill in the small card that you filled in the right numbers. You can call them something other than the I.R.S. if it’ll make you feel better.”1
Whether the U.S. continues its current system or adopts a flat tax or national sales tax, some agency must assure the integrity of returns filed by taxpayers and pursue the non-compliant. Although about 83% of Americans fully comply with the current tax system, 17% of the public chooses not to comply. In the past a vigorous IRS enforcement regime created an environment that has kept the U.S. compliance rate among the highest in the world. One only needs to look to Greece, a country with a corrupt tax enforcement agency and a populace that views compliance with tax laws as voluntary not mandatory, to understand the impact of lax tax regimes. As all the world knows, Greece is on the brink of bankruptcy caused in no small part by the refusal of its populace to pay their taxes. In the current environment where politicians use the IRS as a whipping boy one must project at some point this country may become a failed country like Greece because it chose not to adequately fund its tax agency and enforce its tax laws.
Congress has cut the IRS budget by more than $1 billion dollars over the past five years. That represents a 20% reduction in its budget in inflation-adjusted dollars and seriously imperils our U.S. tax system. The Treasury Inspector General reports less than 40% of taxpayers calling the IRS for advice during the 2015 tax season were able to speak to an IRS representative for tax advice. The IRS has also announced it is only able to answer routine tax questions and not difficult questions. It no longer provides any tax preparation assistance to taxpayers.
In the enforcement area the budget cuts have had direct impact on the number of tax returns audited by the IRS. The 2014 audit rate was about .8% down from over 1% just five years ago. There has also been a 20% reduction in IRS criminal investigations in the last year; and the rate at which the IRS is able to levy assets of taxpayers who chose not to pay their taxes is now at 50% of the rate three years ago. A Washington Post article recently reported the Dallas IRS office could not pursue individual taxpayers owing less than $1 million because of lack of sufficient revenue officer staffing. It should be noted however the IRS continues to pursue taxpayers with smaller tax obligations via its computerized Automated Collection System.
Many commentators have noted the IRS enforcement activities in examinations, collection and criminal enforcement produce $6 for every dollar spent. In other words Congress misguided IRS budget cuts have only served to increase the federal deficit. Tax cheats and scofflaws now have 20% less chance the IRS will discover their non-compliance. Those who choose not to pay their taxes know the IRS is much less likely to levy their wages or bank accounts. Many have noted at the very least the current IRS budget crisis results in a tax cut for the most dishonest Americans while the honest majority must shoulder more of the cost of our society. No one can even project the future cost of the budget cuts as more taxpayers choose to play the audit lottery or simply do not pay their taxes because of lax enforcement.
Once again this year the administration has asked Congress to partially restore the IRS budget to assure our tax system will not suffer the fate of lax tax regimes in other countries. The proposal has been derided by many in Congress. It may be many in Congress are sympathetic to tax cheats. As Mark Twain once said “The only native American criminal class is Congress.” Another great American, John Adams, our second president once said, “In my many years I have come to a conclusion that one useless man is a shame, two is a law firm and three or more is a Congress.” It is time for Congress to suspend its political vendetta against the IRS and provide adequate funding so honest Americans can feel they are not fools for choosing to comply with our tax laws.
Robert E. McKenzie is a tax partner in the firm of Arnstein & Lehr LLP of Chicago.
1. Reported by Alan Rappeport, New York Times, 3-31-15
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- Written by: CPA Magazine
As the formal tax season ends, tax professionals are implementing the last of their dollar saving tactics for their clients that filed extensions. Three industry tax experts offer tips to deepen a tax professional’s expert advice to ensure all clients come back next year.
For many clients, tax time is a once a year thought that involves last-minute gathering and back-pedaling through papers. These tips help your clients stay more organized throughout the year by sharing these everyday tax-saving opportunities.
1. Childcare expenses
Parents who work, attend school or are disabled may be able to write off childcare expenses for children younger than 13. The Child and Dependent Care Credit includes before and after-school care and day camp (overnight camp does not qualify). The credit amount depends on income, but is generally 20% to 35% of up to $3,000 in qualifying expenses per dependent, or $6,000 for 2 or more dependents.
2. Standard mileage
Instead of calculating costs of using a vehicle for business, charitable, medical or moving purposes, you can use the IRS' standard mileage rates.
3. Home office deduction
Whether you're self-employed or an employee, direct and indirect expenses for use of your home for business purposes may be deductible. The space must be regularly used as the principal place of business or for business meetings. The deductible amount is determined by the percentage of your home used and whether your gross business income is less than your total business expenses.
4. IRA contributions
Depending on your adjusted gross income (AGI) and whether you're covered by an employer-sponsored plan, you may deduct up to $5,000 of contributions to a traditional IRA. If you're 50 years old or more, you can deduct as much as $6,000.
5. Medical expenses
If medical and dental expenses for you, your spouse and dependents exceed 7.5 percent of your AGI, costs may qualify as an itemized deduction. Expenses meeting IRS criteria may include insurance premiums, fees paid to medical professionals, prescription drugs, transportation costs and hospital services.
6. Charitable gifts
If you itemize deductions, you can deduct the cash amount or fair market value of the household goods donated to qualified organizations. Keep a copy of the bank record or official notification from the organization for monetary gifts. If you receive benefits in return for the contribution, you cannot deduct the value of the benefit.
7. Mortgage interest
If you itemize, you can generally deduct the interest paid on your home mortgage(s). The deductible amount depends on the mortgage date, amount and how you use the mortgage proceeds.
- 2nd Story Software
8. Tax (or At Least Interest and Penalty) Saving Opportunities on 2011 Tax Returns
Most of the tax changes for 2011 were not new tax breaks but changes in reporting requirements to reduce reporting errors on returns. The main new tax break for 2011 was the payroll tax reduction, which was done through the payroll system and does not need to be reflected on the tax return. Here are some tips on some new tax compliance requirements to help your clients avoid interest and penalties on their federal tax return.
9. Form 1099B and Form 8949 – Stock Basis Reporting
Brokers for the first time for 2011 transactions are required to report the basis of stock acquired after January 1, 2011 on Form 1099-B. Taxpayers will be required to put this information on a new Form 8949, supplementing the capital gains reported on Form 1040 Schedule D. Several Form 8949s may need to be completed, depending on whether the transaction is reported on Form 1099-B and whether the Form 1099-B includes basis information. Tracking basis reporting on Form 8949 to basis reported on Form 1099-B will help taxpayers avoid having the IRS pull their return because the information on the return does not match the information reported by the broker.
10. Repayment of First-Time Homebuyer Credit
Those taxpayers unlucky enough to have claimed the First-Time Homebuyer Credit in 2008 and who therefore got stuck with a repayment obligation do not have to file a Form 5405 again this year, as they did last year, assuming that there is no change in their situation, such as a sale of the home. There is also a new line on the Form 1040, Line 59b, for reporting the 2011 installment of the repayment of the First-Time Homebuyer Credit.
11. Form 8938 – Foreign Asset Reporting
U.S. citizens and resident aliens with foreign assets have a new tax reporting requirement for those foreign assets to go along with the pre-existing Foreign Bank Account Reports (FBAR). Foreign assets exceeding certain values for the first time on 2011 returns have to be reported on Form 8938. The reporting requirement applies even if the foreign assets produced no taxable income. Careful attention to this reporting requirement can avoid significant penalties for failure to report foreign assets.
12. Reporting 2010 Roth Conversions
Taxpayers who did Roth conversions in 2010 and elected the two-year spread of the tax on those conversions need to remember to include the first half of the taxable portion of the conversion amounts on their 2011 tax return.
- CCH
13. Extended Deadlines When Claiming Deductions for Simplified Employee Pension Plans
Typically, setting up an IRA or making retroactive traditional IRA, Roth IRA, Health Savings Account, SEP-IRA, and 401(k) contributions for the 2011 tax year must be done by the applicable tax return’s due date. However, taxpayers can take advantage of extended tax return deadlines when claiming deductions for simplified employee pension plans.
Businesses and self-employed taxpayers may set up SEP plans for employees by the entity’s tax deadline, fund the plan in the current year, and claim the deduction on the prior year tax return. For example, a self-employed taxpayer filing his/her 2011 taxes can set up a SEP by April 17, 2012, deposit the contribution, and then claim the deduction on the 2011 tax return.
Similarly, businesses and self-employed taxpayers can file an extension this year; pay any tax, penalty, and/or interest; claim the SEP deduction; and then deposit the SEP contribution before the extended deadline. If the return is filed before the extended due date, the contribution to the SEP can still be made after the return filing date as long as the plan is funded by the extended deadline.
Note: Any contribution made in 2012 should appear on the 2012 Form 5498 rather than on the 2011 form. This is because the IRS requires the contributions to be reported on the form for the year they are physically funded to the account instead of for the year to which the contribution applies.
14. Traditional IRA: Another Tax Saving Option
Setting up a traditional IRA is another tax-saving option. However, it must be done by April 17; the extension deadline does not apply.
15. Recharacterizing an IRA Contribution or Conversion
An additional possible tax benefit deals with recharacterizing an IRA contribution or conversion. If an IRA holder makes a traditional IRA contribution, but later discovers that s/he is no longer eligible for the tax deduction, it may be beneficial to recharacterize that contribution to a Roth IRA contribution. Likewise, if an IRA holder originally made a Roth IRA contribution, but wishes to take advantage of the tax deduction, s/he can recharacterize that contribution to a traditional IRA contribution.
October 15 is the last day to recharacterize any IRA contributions or conversions for the year if taxpayers filed their returns on time, which is April 17 for most individuals.
- RedGear Technologies