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- Written by: T. Steel Rose, CPA, ACS Editor
Tax dodgers cost the Department of Treasury an estimated $300 billion a year. According to the IRS, 83% of taxpayers are fully compliant by paying their share of taxes. Of the 17% non-compliant, the most egregious are those who do not report income. “Some people believe you only have to report the credit card receipts and not the cash revenue,” said Dan Henn, CPA, tax resolution specialist. “You must report all that comes in and goes out. Not filing and reporting is fraud and is criminal.”
Good and proactive advice from a CPA to his or her clients would be to not fall into the temptation of “knock down money.” I am sure it has other names as well. I heard the term knock down money when I owned part of a restaurant. It seems restaurants deal with a lot of cash. Instead of paying sales tax on the revenue and IRS tax on earnings, restaurants are tempted to pocket cash without depositing it into the bank, hiding it from the IRS.
The late comedian George Carlin spent the later years of his life paying back the IRS. Carlin had a $3 million IRS tax debt according to a 2001 interview with Esquire magazine. “Because of my abuse of drugs, I neglected my business affairs and had large arrears with the IRS, and that took me 18 to 20 years to dig out of,” Carlin said. “I did it honorably, and I don't begrudge them. I don't hate paying taxes, and I'm not angry at anyone, because I was complicit in it.” While Carlin did the right thing, he highlights the problem of penalties and interest in an interview with Bankrate.com. “Penalties and interest on back taxes make a mountain out of a mole hill,” he said.
If George Carlin’s story isn’t enough to persuade clients to not delve into unreported income, consider how sophisticated the IRS has become to find noncompliant taxpayers. While catching tax evasion is impacted by budget cuts, the IRS is using electronic robots to mine the wealth of data it already has about suspicious tax dodgers in combination with what they find on social media. Celebrating extravagant vacations and promoting a successful side business may prove fascinating to the IRS. According to Kristen Mathews, a partner attorney at the law firm Proskauer Rose LLP, the IRS will be checking individual Facebook and Twitter accounts for improprieties.
Reportedly social media monitoring is done only if a tax form raises a red flag. While the IRS is secretive about its methods, sources indicate the IRS is gearing up its data mining. Online activity trackers enhance the trove of information the IRS already uses based on your social security number and banking transactions.
It seems everyone from Google to Nike is assembling data to create profiles of us. According to UK publication, The Guardian, the IRS has one tool called Riot. Developed by Raytheon, this tool can mine information from social networking websites and predict behavior based on the data. Riot is allegedly able to extract data embedded in photographs that have been shared on social media to provide geographic information to track an individual’s movements. However, there is no evidence the IRS would resort to this degree of monitoring. It seems they may be using predictive analytics to predict which individuals don’t pay their taxes.
If the IRS is acquiring taxpayer information from digital activities such as eBay auctions, credit card and e-payment transactions in search for tax cheats, taxpayers should know that whatever people do and say electronically can be used against them in IRS enforcement. Consumers may be familiar with Internet cookies used to track their movements and send them targeted ads that follow them to different websites. In trade presentations and public documents, Former Commissioner of Internal Revenue Douglas Shulman said IRS technology will employ “billions of pieces of data” to target enforcement and “detect and combat noncompliance.”
U.S. Tax Court records reveal information gathered from Facebook and eBay postings have been used by the IRS in defending tax challenges. Under a Freedom of Information Act disclosure obtained by privacy advocates at the Electronic Frontier Foundation, the group published the IRS' 38-page manual used to train auditors to search Internet addresses, Facebook postings and other social media to back audit enforcements.
In 2012 the IRS used a profiling test model to study 1,500 tax preparers with histories of reporting deficiencies and recovered $200 million. An entire year of tax returns amounts to 15 terabytes, or just 1.5% of the IRS storage of 1.2 petabytes (one quadrillion bits of information), based on public data from IRS presentations. The agency has expanded its data capacity by 1,000% in the past six years.
As the IRS audit staff has been reduced by budget cuts this year, the agency will be forced to rely on computer-generated audits more than ever. Then it is up to the taxpayer to prove he or she does not owe the tax the IRS has determined. Clients are looking for proactive advice from CPAs.
Any CPA with a client in the midst of an IRS audit will tell you the horror stories of their client’s sleepless nights. The aftermath for many is not as positive as George Carlin’s. Many spend their retirement on a strict spending plan paying off the IRS for the rest of their lives.
The Roman philosopher Lucius Annaeus Seneca once wrote “time discovers truth.” If the truth is your clients are hiding unreported income, it is responsible to inform them it is wrong and stupid. Instead help them get more sophisticated in their tax planning.
Publishing CPA Magazine since 2002, T. Steel Rose began his career with Price Waterhouse leading to the start of Rose & Cash, CPAs. He was a VP for Solomon Software, now owned by Microsoft, and launched CPA Software News in 1991.
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- Written by: Adam S. Fayne, J.D.
In recent years, the IRS has been asserting more civil fraud penalties during the examination phase. While a civil fraud penalty may be expensive, many clients should be relieved that the case was not referred or accepted for criminal investigation. During 2015, the IRS initiated 3,853 criminal investigations, which led to 3,208 indictments.
In my practice, we refer to our clients’ audits that have criminal or civil fraud exposure as “eggshell audits.” The reason is simple, we are walking on eggshells to try and keep the audit civil without cracking a shell and the audit changing course – civil fraud or a criminal referral.
Tax fraud can be punishable by both civil (i.e. money) and criminal (i.e. jail time and money) penalties, with the civil violations primarily in Title 26 and the criminal violations principally in Title 18, respectively, of the USC. For example, a taxpayer can commit tax fraud and be punished with civil penalties under 26 USC § 6663, without being charged with criminal tax evasion.
There is a statute of limitations for tax crimes, which is the amount of time a prosecutor has to file charges. This statute of limitations represents how long your clients should be looking over their shoulder after – willfully or otherwise – lying on their tax return. The general rule of thumb is the IRS has three years to audit tax returns, and six years if over 25% of income has been omitted from the original filed tax return. You may also need to consider when the six-year period starts. The IRS could prosecute a series of fraudulent tax returns as a single charge and only start counting the six-year period from the last act of tax evasion or fraud. It gets worse. Although the IRS is limited to how far back it can look when filing charges in criminal court, there is no statute of limitations for civil tax fraud. This means the IRS can look back as far as it wants when suing for civil fraud. In practice the IRS rarely goes back more than six years because it has a high enough burden of proof to meet in fraud cases without having to deal with the added difficulties of proving older charges.
Civil tax fraud does not include jail time but it can include severe penalties along with the stigma of being liable for “fraud.” Civil penalties include I.R.C. § 6663 Civil Fraud which carries a penalty of 75% of the tax underpayment due to fraud and I.R.C. §6651(f) Fraudulent Failure to File which carries a possible penalty of 75% of the unreported tax. The term “fraud” means an “intentional wrongdoing on the part of the taxpayer motivated by a specific intent to evade a tax known or believed to be owing.” Stolzfus v. United States, 398 F.2d 1002, 1004 (3rd Cir. 1968), cert. denied, 393 U.S. 1020 (1969). The IRS must establish fraud by clear and convincing evidence. It is presumed that the entire underpayment is attributable to fraud unless the taxpayer can establish otherwise by a preponderance of the evidence. IRC § 6663(b). Also the IRS cannot impose the civil fraud penalty unless a return has been filed. IRC § 6664(b). However, the fraudulent failure to file penalty may be imposed if no return is filed. IRC § 6651(f).
Auditors are trained to look for tax fraud and look for common types of suspicious and fraudulent activity, such as:
· Overstatement of deductions and exemptions.
· Falsification of documents.
· Concealment or transfer of income.
· Keeping two sets of financial ledgers.
· Falsifying personal expenses as business expenses.
· Using a false Social Security number.
· Claiming an exemption for a nonexistent dependent, such as a child.
· Willfully underreporting income.
Although auditors are trained to look for fraud, they do not routinely suspect it. They know the tax law is complex and expect to find a few errors in every tax return. A careless mistake on a tax return might result in a 20% penalty to the tax bill. The line between negligence and fraud is not always clear, however, even to the IRS and the courts.
Lastly, there is also a difference between tax fraud and tax evasion. Tax evasion is a subset of tax fraud and it is typically used in the criminal context, as in someone who is charged with the crime of tax evasion in violation of 26 USC § 7201. Tax evasion usually entails a deliberate act of misrepresentation of taxable income to the IRS. Common examples of acts which could result in a charge of tax evasion are: not declaring all income, deliberately overstating expenses or deductions, or failing to file tax returns when there is taxable income in an attempt to avoid detection.
Adam Fayne is an attorney with the law firm of Arnstein & Lehr LLP. Prior to private practice, he was an attorney with the Internal Revenue Service Office of Chief Counsel. He has represented many taxpayers nationally and internationally with IRS examinations, IRS appeals, Tax Court, criminal defense, and foreign compliance matters. He may be reached at (312-876-7883 or
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- Written by: Joshua Fluegel
Individuals and businesses put great thought into what must be done to preserve income from the government. Lest the world forget, tax professionals are making sure citizens are receiving their share of their income and defending them from the often-intimidating IRS. This issue of CPA Magazine we shine the CPA Spotlight on Emily Sang, CPA. On top of 1040s, 1120s and trusts, Sang’s practice works with real estate and not-for-profit. CPA Magazine talked with Sang about how her firm navigates tax season and what she recommends fellow tax professionals do to expand their client base.
How did you get into accounting/becoming a CPA?
It was because my mom was a CPA. She worked in the accounting field for many years and she taught me when I was growing up the basics of debit and credit.
What is a technology that helps you a great deal during tax season?
I actually use the Google Calendar scheduler. There is a document manager I use where I scan documents and it automatically loads into the document manager under a specific folder that I create. A lot of times email has a hang out function. We will collaborate using Google Hangouts and do group teaching.
What is a tip you would give for marketing your CPA services?
I think everything goes with marketing. I love meeting new clients. I love meeting new people. For example, during tax season I get evites from different groups, either community events or some kind of association; and they need someone to give a presentation on tax basics to their members. I would say any time you get an invitation to those events, participate in them and provide the attendees upfront value and do not sell them anything. Usually I will gain clients organically.
I don’t do much internet marketing although I am working on increasing my business’ online presence. I do get a lot of referrals from clients and I do enjoy working with them because the best clients you can get are people who already know who you are. When you work with them they are very open to your advice.
I would say just focus on meeting people, number one. And number two, focus on providing excellent service to clients.
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| Sang at a Hollywood event. |
What if you are a new CPA? How do you get invited to events?
Actually there are lot of events hosted by CalCPA, for example, and also there are non-cpa related events. I go to a lot of non-business related events like charitable events. That way you can join a cause that does a lot of good things for the community and the people remember you. You get your good deeds done and potentially have more people who like to refer you. I think any event would be very beneficial. If I get an invitation I make time and really try to go.
Entertainment events like birthday parties or hiking events also work. I don’t really have to advertise that I am a CPA. It’s very funny, people always consider you for themselves or refer you to a potential client. I think it’s because CPA is a very practical profession.
What is something that would guarantee failure during tax season and how do you prevent it?
I would say most CPAs are probably good with their professional expertise of helping clients. However, number one would be not getting back with your clients on time or at the time you promised you would. I know I have my share of difficulty getting back with clients in a timely manner but my number one pet peeve is not getting back with my clients when I wanted to.
You have to put your clients on the calendar. Set a date for next time you can meet or deliver the returns. Also, try to help your clients right away to avoid creating a backlog. If for any reason you cannot get to them, have another person help on a contract basis. The person needs to be someone you can trust and you must review their work to make sure it is done to your satisfaction. At the end of the day it’s your name on the signature line, right?
Number two is not being organized with all your clients regarding billing, progress and who’s working on what. If you do not have a really good way of tracking your clients’ progress then some people are going to eventually be left out and that could eventually backfire on you. I would say get on top of your administration. It is ideal if you can hire someone to handle administration, even on a part-time basis.
What would you say was one of the most influential moments in tax in the past 15 years?
Based on my personal experience I just love the idea of being able to be anywhere and at any time be able to help your client using technology. One year I was in Costa Rica and I was helping my clients up until the deadline, April 15. The convenience created by technology has made my life much, much easier.
What do you like to do in your free time?
I truly say I really enjoy what I am doing. I don’t feel like I’m working, I feel like I’m constantly doing things I love. I travel, of course I’m sure everyone loves to travel.
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- Written by: Joshua Fluegel
Perfection is a goal only achieved through the painstaking process of determining problems and preventing them from reoccurring. Accordingly, the following payroll processing vendors present problems many of their users have had in the past accompanied with ways to identify and remedy them. For example, maintaining healthy standards of communication and understanding between CPA, client and software is an excellent way to strive for a perfect payroll.
“This lack of understanding [of payroll software] and validation of accuracy can put the CPA at risk as there are several cases where the CPA is responsible for their client’s payroll taxes and possible penalties,” said Chuck Gossett, CEO of Cougar Mountain Software. “We believe the entire accounting department as well as external bookkeepers, auditors, and CPAs should be familiar with the accounting software which is being used…This involvement minimizes the exposure risk for CPAs and other parties.”
“A major obstacle can be the time gap between the payroll specialist (CPA) and the client fulfilling their respective roles,” said Mohammed Ghani, president of CheckMark. “It is important that both the client and the CPA have access to all information either through a web portal or a cloud application.”
Gathering data and maintaining the ability to share data among all software a CPA uses is an essential. A CPA can integrate every piece of software into a practice with all other currently used tools in mind.
“One key potential problem with payroll processing software is with information gathering and management,” said Chandra Bhansali, co-founder and CEO of AccountantsWorld. “Whether it’s obtaining timesheets with hours from employees, locating the correct unemployment rate for each new year from employers, or getting information about third-party payments, these are all significant challenges. CPAs need software that provides visibility into the information they need – for example, enabling them to easily review payroll information for a client’s look-back period to determine whether to change the client’s federal tax deposit frequency – and that helps them to collect information on a timely basis with automatic reminders, and easily-generated custom or batch emails.”
“Since the CPA’s major concern is often preparing his client’s financial statements, his Payroll software must also include write-up integration and/or provide built-in General Ledger summation reports for quick export to the write-up system according to client’s specific chart of accounts,” said Ken Garen, president and co-founder of UBCC.
“One of the most common problems CPAs have with payroll processing software is the seamless integration of their payroll solutions into accounting software,” said Ralph Matlack, director of product management, small business payroll at Intuit. “Not all payroll solutions can perform data sync with accounting software, which can cause manual data entry errors or require more client action.”
“Using inadequate payroll software can now become a problem where it wasn’t before,” said Ray Fazel, president of Paymate Software. “The businesses that do need this kind of detail (and not all do) require a robust system that is flexible and easily capable of integration with accounting, time & attendance, scheduling and other software. The solution to the problem is seemingly simple, but often harder to execute: switch payroll software, or upgrade to the next level of the same software that can handle the required payroll/accounting complexities. Making the switch can be hard, but definitely worth it.”
A CPA must keep the IRS in mind with every step taken. This means knowing tax law and ACA compliance to ensure complete compliance for all clients.
“Learning the compliance rules of a particular industry may be so difficult that the CPA may decide to turn away payroll work rather than invest in learning those rules for only one client,” said Tom Douglass, president of Advanced Micro Solutions. “For this reason, many CPAs decline to perform payroll services for restaurants while other CPAs specialize in that service. Similar situations arise in other industries, such as agriculture or construction.”
“Changes to payroll laws, regulations, rates and forms are ongoing and rapid,” said Jim Paille, director of compliance, myPay solutions at Thomson Reuters. “It is essential to team with a technology vendor that can keep up with the ongoing payroll tax compliance changes that take place on federal, state and local jurisdiction levels.”
“The company needs to make certain all information needed by the CPA is accurate and timely, ensuring that employees can be paid on-time with the deductions and benefits calculated, and all reports and taxes can be filed and paid so no penalties are accrued,” said Ken Hilton, president of Red Wing Software. “Therefore, more important than the software used, is ensuring that a written process is established and followed to the letter by all involved at both ends of the relationship.”
“One of the biggest risks for a CPA offering payroll services to their clients is compliance. It is important to ensure the payroll processing software they use can help them comply with current federal, state and local regulations,” said Anthony Horton, vice president and general manager – specialty products at ADP. “To mitigate the risk that exists in in this environment it is imperative that CPAs partner with a company who has the expertise and ability to assist them in adapting to these regulatory changes quickly… CPAs should also look for an organization that will file their clients’ payroll taxes and has a team of payroll professionals readily available to offer help.”
By taking this advice a CPA may become a fountain of wisdom and perhaps even perfect at payroll. It’s one thing every employee insists on.
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- Written by: Joshua Fluegel
CPA’s time is valuable. Keeping track of it, especially during tax season, is paramount in order to see a healthy return on investment for months of tireless efforts. Fortunately time and billing software can help a CPA keep track of where his or her day goes.
“Time and billing software provides CPAs with information that supports preparation of federal, state, and local income and/or franchise tax returns - reducing return preparation time and the related fees for such services,” said Curt Finch, CEO of Journyx. “It facilitates the calculation and related accounting for labor costs that must be capitalized for tax purposes, labor costs associated with passive or otherwise separately reportable activities, labor cost components eligible for various tax credits, and payroll apportionment factors required for multistate tax filings.”
“With tax season being so busy it’s easy for things to slide,” said Terence Cummings, vice president, sales at Sage Software. “Especially when it comes to tracking time. A few minutes here or there might not seem like a big deal at the time. But if you do this a few times every day, think about how much time you’re not tracking and billing for by the end of tax season. Be sure you have a solid system in place to help you track all of your billable time.”
“The use of time and billing software provides you the ability to apply a configurable workflow that allows your organization to review and approve the final details before submission for compliance purposes,” said Kevin Sequeira, general manager at Tenrox.
Keeping track of time not only ensures you get paid but proper use of time and billing software also saves valuable minutes.
“It’s helpful to keep the time and billing system open all day during tax season,” said Tom Dawson, president of TPS Software. “Everyone is very busy and working the hardest that they do all year so requiring the extra step of opening the program to record either time spent or stage of the return is counterproductive. Always try to minimize the struggle to record. More will be recorded and the accuracy will be better if effort is kept to a minimum.”
“Excel and Pen/ Paper tracking systems create additional work for you and your staff, and a lot of non-billable hours,” said Shafat Qazi, CEO and founder of BQE Software. “You need a time billing software that completely automates your processes and offers intuitive, easy to use time/expense capture tools.”
Counting and managing time spent with various client tasks not only saves money but it finds the proverbial sweet spot in the revenue/expenditure matrix maximizing profit.
“By tracking your time worked against billed and collected amounts you can see which of your hourly and flat fee clients are profitable over the short and long term,” said Michael Lipps, managing director of business and litigation software solutions at LexisNexis. “Several time and billing software applications have custom reporting options built into the system which can be used to tailor a report to meet a client’s specific needs. This not only helps clients more easily digest the information that is being presented to them, but shows they are a valuable partner to you.”
“Invoicing your services at or close to the time they are provided will enhance cash flows and improve the likelihood that billing disputes are resolved in your favor,” said Fred Lindsley, president of ImagineTime.
Time and billing no longer simply helps a CPA keep track of time spent filing taxes and conducting research but it now can tie all tax processing efforts together for the practice.
“Get online now,” said Brian Saunders, CEO of BigTime. “If you’re thinking of a timesheet as just a history of time, or an invoice as just a vehicle for billing, then you’re missing the true power of cloud-based practice management. It’s more than just an online repository of timesheets, invoices and notes. Big data is on the verge of providing you with the practice management equivalent of “instant replay” (together with a virtual press-booth of data analysts).”
“Automate routine tasks to the greatest extent possible,” said Brett Owens, CEO and co-founder of Chrometa. “Think about the overhead tasks you spent the most time on in previous tax systems. Was it chasing down time entries? Billing customers? Making sure you got paid? There is now software that can automate each of these tasks for you. If one or more was something you spent too much time on previously, look for a product that will reduce your headaches and busywork.”
“As tax season approaches, timesheet data is often a critical source document for so many aspects of the year’s end,” said Chris Vandersluis, CEO of HMS Software. “You may need auditable task-based timesheet data for Research Tax Credits, Sarbanes-Oxley compliance if you are publicly traded, Defense Contract Audit Agency Compliance if you do any work for Homeland Security or numerous other scenarios. Auditable task-level timesheets opens the opportunity for many grant and subsidy programs that require you show how your firm spent its time. Even if you haven’t been gathering task-based timesheet data so far this year, starting now can show good faith that you intend to follow such a practice and that can be a huge factor should you face an audit in the spring.”
Time and billing software is an intricate part of a CPA’s practice. Such an important cog in the machine is worth all the time a CPA can give it.
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