"In This Land of Milk and Honey, You Must Put Them on the Table"

[Title borrowed from a Steely Dan song of 25 years ago or so] [Topic also covered in Web CPA at http://www.webcpa.com/article.cfm?articleid=20128] The Senate Finance Committee has called for tax forms of the last five years from the 15 largest petroleum companies to assure that these companies have been correctly calculating tax liabilities. Specifically, Forms 1118 (foreign tax credits), 1120, 5471 (controlled foreign corporations), 6765 (research activities credit) and Schedule M-3 (book to tax income reconciliation on Form 1120) will be scruntized.

It is no surprise that the oil companies are going under the microscope--ExxonMobil's package to Lee Raymond of $100 + million alone might have been enough to raise hackles. The big question--are there enough sharp staffers to accurately access the results? Seeing that neither Grassley nor Baucus prepared their own tax return last year (see last week's "Do What I Say, Not What I Do" post), staffers will hold the key to the credibility of the investigation.

$100 Rebate on Gas Taxes: To Be Seen as Benefit or Band-Aid?

Republican tax writers have proposed a $100 rebate on gasoline taxes to be paid for eliminating LIFO inventory accounting in the oil and gas industry and by repealing a two year amortization period for domestic oil exploration (returns to previous five year period). Republicans are also attempting to extend a election to expense certain refinery costs, to exempt alternative fuel hybrid cars from the Section 280F annual depreciation limitations and to pair a proposed windfall tax with drilling for oil in the ANWR region of Alaska.

Republicans are clearly and understandably concerned with the damage that high oil prices may cause to their 2006 propects; in my opinion, the present high gasoline prices (nearly $3 per gallon) probably are more damaging to GOP chances in November than the events in Iraq. Having said that, what about the proposal: [1] I can't see taxpayers getting real excited about $100, [2] the techniques to pay for the rebate sound okay (they add to tax complexity, but tax complexity for petroleum is already extremely high). The other three ideas (alternative fuel exemption from 280F, etc.) sound okay to me, but the ANWR move might not play well in the "blue" states with environmentalists.

Hit and Miss Time

Sorry about limited posting recently. With finals coming up, then perhaps a short vacation, posting will be less consistent than usual for the next 2-2.5 weeks.

Disaster Planning for Your Wallet

Although obviously a lower priority than personal safety, having a plan to protect financial assets and information in case of a fire, power outage, weather catastrophe or similar event is strongly recommended by MassMutual and the Insurance Information Institute of New York. Suggestions include an air, heat and water-resistant package which has records of mortgage deeds, insurance policies, wills, prescriptions and medical records; a small amount of ready cash in case banks are closed and photocopies of credit cards, insurance cards and driving licenses. Annual insurance reviews, inventories of house belongings and consideration of flood insurance were additional recommendations.

I cannot claim to have most of the items mentioned here completed; at the same time, the ideas are reasonable and appropriate.

Pollution Taxation: "Saving Mother Earth" or Hurting Economic Growth?

Since the first Earth Day 36 years ago, government regulation and taxation related to pollution has been greatly expanded. In theory, this is an appropriate approach to reducing a "negative externality"; the question then becomes: does this work in practice? The authors reply: results are mixed. Some legislation, such as taxing ozone-depleting chemicals and development of the SuperFund, have been successful at reducing undesirable emissions and raising monies for clean-up. Sewer fees in Maryland have helped Chesapeake Bay as well. In general, the authors believe that taxes are more effective than regulations, especially where emissions can be clearly measured. Taxes, the authors argue, are more flexible in application (example: they are better at adjusting for internal costs of pollution to the firm), are more likely to encourage innovation and a possible reduction in societal costs. A major assertion of the authors is that pollution compliance costs is FAR removed from trivial. The Hawaii Reporter estimates that compliance costs for environmental regulation nationwide exceeds $200 billion and the Conservative Voice estimates that the overall tax compliance cost to society is between $100-200 billion.

Several items here: [1] I believe that it is a matter of time until reporting of the environmental impact of publicly-traded corporations becomes a required disclosure in the notes to the financial statements, [2] environmental activists and governmental leaders cannot be allowed to ignore the costs of environmental legislation. By no means should the latter point mean that NO legislation regarding environmental regulation should exist; what is does mean is some past legislation should be reconsidered based on cost/benefit analysis and that future environmental legislation should provide incentives as well as penalties. Finally, there is a tension between using tax policy to produce environmental important, an approach favored by the authors of this report, and controlling complexity in the tax code.

Do What I Say, Not What I Do

Out of four top Congressional tax writers, only William Thomas (R-CA) prepared his own return. Meanwhile, Charles Rangel (D-NY), Charles Grassley (R-IA) and Max Baucus (D-MT) had professional preparers complete returns for them. Alicia Korney of WebCPA points out that this is a slighter higher rate than the over 60% of taxpayers nationwide which use paid tax preparers.

While paid tax returns provide jobs for accountants and attorneys and increase the GNP, the fact that tax writers ask for help in preparing personal returns seems to indicate real value in working to simplify taxes. Not all is lost, however; Senator Grassley's acknowledgement of using a paid preparer should provide good fodder for a follow-up by Joe Kristan of his "Average Joe Strikes Back" post last week in Roth CPA Updates.

Accounting Headed for a Diet?

The Financial Executive Institute's Summit last week featured discussion of "lean" accounting. The concept of lean accounting comes from lean management, a management which weds favorite management concepts of the 1990s such as just-in-time inventory, total quality management and others. For accounting, lean means getting away from batch accounting and restructuring accounting and computer systems. A Lean Accounting Summit, held in Orlando around the autumn equinox, will feature such speakers as James Womack, arguably the guru of lean manaagement; Orry Fiume, who spoke about lean accounting at the FEI summit; Richard Schonberger and Norman Bodek.

Though I cannot a imagine a massive revolution in accounting procedure based on lean management techniques, I could conceive of some techniques gaining favor, especially in manufacturing businesses. Therefore, CPAs who audit manufacturing businesses and controllers of manufacturing businesses at least need to monitor lean accounting to see whether it is gaining momentum.

Treasury Places Tax Cuts on Dividends and Capital Gains as More Critical than LT AMT Fix

Treasury representative Tony Fratto chose "1040" day (April 17) to express that extension of capital gain and dividend tax cuts were more urgent than extending the AMT patch. Fratto said that while the AMT needed attention, no action was required until next January since that would start the next filing season. In the meantime, Fratto asserted, investors needed to ensure the continuation of the portfolio tax cuts to maintain economic momentum for the present mini-boom. House Minority Leader Nancy Pelosi (D-CA) quickly seized on the opportunity to portray Republicans as callous toward the concerns of working Americans. She claimed that millions of families would effectively see a tax increase. Tax reform apparently is now SO 2005; it barely got mentioned.

Although Ms. Pelosi remarks were excessive, her basic point, in my opinion, is valid. Taking AMT out of the picture for taxpayers earnings less than $120,000 if MFJ (married filing jointly), $80,000 if single and $60,000 for MFS should be a very high priority--likewise, even those earning over these amounts should be protected from the AMT if 80% or more of all income is from earnings (whether W-2, Schedule C, Schedule E (if active participant in partnership or Subchapter S business) or Schedule F). Finally, the above numbers should be indexed for inflation. On the dividend/capital gain front, my preference would be for inflation-adjusted gain taxation; since that probably is unrealistic, I would favor a small unified exemption (perhaps $200-$500) amongst capital gains, dividends and interest with the rest taxed at a maximum rate equal to the second lowest tax rate (the relatively few low-income taxpayers with capital gains, dividends and interest in excess of the exemption would, of course, get to use the lowest rate).

Hooray!! Tax Season is OVER!

Congratulations to all the practitioners (except sympathy points in certain parts of New England where today is the last day) on surviving another tax season. Take a day off and spend some time with your family or a favorite activity!

IRS Program Funds Special Tax Assistance to Low-Income Taxpayers

Over 150 organizations in all 50 states plus the District of Columbia and Puerto Rico received funding of up to $100,000 annually from the IRS. Taxpayer advocate Nina Olsen announced that total matching grants for Low Income Taxpayer Clinics totaled $8 million. The clinics are designed to provide low-income taxpayers with legal assistance in disputes and also to explain tax rights and responsibilities to taxpayers not yet comfortable with English.

While requiring a higher level of training than VITA, the Low Income Taxpayer Clinics sound like an excellent way for lawyers to meet state "pro bono" requirements and for socially-conscious business or law graduate students with CPAs to provide real service to people in need.

Internal Revenue Service Converts Enrolled Agent Exam to Format Similar to CPA Exam

The IRS announced that a computer-oriented exam for aspiring enrolled agents (EAs) could be in place as soon as this fall. Features of the exam would include: an eight-week window to take, four sets of windows per year, candidates could take parts of the exam without having to take the entire exam and candidates could keep parts of the exam in which they had a satisfactory grade. Thomson Prometric, which will administer the exam for the IRS, anticipates that the exam can be given in over 300 sites compared to the present 90. The IRS will maintain oversight of the testing process.

A good strategy for the exam; especially the expanded range of locations available for taking the "EA" exam.

Refundable Tax Credits: More Efficient Poverty Relief than Direct Government Spending?

IRS and Treasury officals, such as IRS earned income credit (EIC) director David Williams and Treasury Deputy Director of Individual Taxation Janet Holtzblatt said that administrative complications should make Congress wary about adding additional credits. Nevertheless, Holtzblatt said that she had become convinced that the EIC was worthy of being in the code; moreover, the EIC was the only contact that many working poor families had with the Internal Revenue Code. The EIC was also praised for efficiency--an administrative cost of 1% versus up to 40% for food stamps and for participation rates of 75-80%. NYU Tax Professor Lily Batchelder effectively encouraged a refundable credit for home ownership and modifying other tax incentives into refundable credits.

Ms. Batchelder's fellow NYU Tax Professor Daniel Shaviro runs a tax blog linked at right called "Start Making Sense." Based on apparently reluctant testimony by Ms. Holtzblatt, the earned income credit is indeed making sense.

Greenspan Darns SOX

Former Federal Reserve Chairman Alan Greenspan announced his discomfort over the impact that Sarbanes-Oxley has had on initial public offerings (IPOs) and suggested that it needed to be modified. Greenspan, a proponent of SOX when it was being considered in Congress, liked the improvement in corporate governance but feared that the internal control certification feature was causing too many IPOs to be done in the more relaxed rules of London. A lobbyist stated that it is not likely because of political ramifications in a congressional election year that SOX would be modified. A more hopeful note came from former NYC mayor Rudolph Guilaini, who believed that the London and Tokyo exchanges would soon have legislation similar to Sarbanes-Oxley.

On a Hill, Far Away...

Lord, have mercy upon me, a sinner.

PayPal Told to Provide Transaction Info to IRS

A federal court in San Jose, CA ruled that the IRS could force PayPal, a major Internet money transfer service and heavily used by eBay customers, to turn over transaction records on customers who might be evading taxes. Eileen O' Conner of the Department of Justice indicated that a major goal in getting access to PayPal was to determine whether customers were underreporting income. Special emphasis was on customers which also had accounts in "tax haven" countries.

Truth in Budgeting: Heartland Legislators Propose Federal Unfunded LT Debt Reporting

(Post #400) Congressmen Chris Chocola (R-IN), Jim Cooper (D-TN) and Mark Kirk (R-IL) have proposed legislation disclosing all federal unfunded long-term liabilities. Chocola anticipates that Social Security, Medicare and other unfunded liabilities may come to over $40 TRILLION in the next 75 years. Chocola foresees a future crisis and stings the Treasury for not disclosing liabilities that would create huge problems if private businesses refused to disclose. As support for the proposal, Chocola cited an article by Clinton appointee David Walker which talked about the US Government being on a fiscally "unsustainable path."

I approve of the Chocola proposal as a step toward reforming federal government accounting. More importantly, I approve of the proposal as another piece of the puzzle, along with the present "Porkbuster" campaign regarding budgetary earmarks and restrictions on the unfunded mandates which cause a sizable amount of fiscal stress for state governments, toward getting control of government spending and economic involvement.

Bank of America: If Not C-Notes, at Least Notes of C

As a thank-you promotion for the CPAs of certain small businesses which use Bank of America as their bankers, CPAs throughout the country will receive an iPod shuffle, a gift card, a stress relief ball and candy. The Bank's Get in Tune is a way to say thanks to CPAs for their assistance to the businesses and acknowledge their hard work at this time of year. Raj Madan says that the ultimate goal is to provide excellent service to CPAs and businesses.

Youngsters of CPAs will doubtlessly be glad to see the iPods. However, the happiest members of the family may be the Labs and Goldens when they see the stress balls.

SEC Must Try Again on Independence for Mutual Funds

In a 3-0 ruling, the DC Appelate Court agreed that the SEC failed to take into account the costs to the mutual fund industry with proposed rules requiring that the chairman of the board and 75% of directors have no ties to mutual fund management. Chairman Chris Cox accepted the decision, which takes effect in 45 days. The rules were passed while William Donaldson, Cox's predecessor, was still in charge. The rules came in response to late-trading scandals during 2004.

The SEC is going to have to be more creative and thoughtful here--or they will suffer the same fate from the mutual fund industry as Senate Finance Chairman Charles Grassley incurred from Roth CPA Updates blogger Joe Kristan last week.

A Little Less Costly SOX

An FEI survey which predominately concentrated on "accelerated filers" (businesses with gross receipts exceeding $75 million, over 200 businesses) came up with an average compliance cost reduction of about 16% from Year 1 to Year 2. The average internal staff-hours were slightly over 22,000 with almost 5,000 external professional hours (other than auditors) required. Average audit fee was $1.4 million, about 13% less than the year before. Most likely benefits were heightened investor confidence (56%), greater reliability (44%), more accuracy (38%) and improved fraud detection (33%) with larger companies comparatively more likely to acknowledge a benefit. 85% of respondents continued to believe costs to exceed benefits, compared with 94% the year before. As far as advice for improving Section 404, popular suggestions included reducing degree of documentation (67%), greater reliance on internal audit (65%), clarify definition of "key controls" (55%), make exceptions for new systems installed in second half of year (45%), clarify "significant deficiency" (42%) and clarify "material weakness" (35%). Financial Executives International (FEI) provides a free press release and executive summary on the link included in the title of this post. A detailed report is available at no charge to FEI members but $99 to the general public.

Situational Tax Ethics: Responding to Friends and Co-Workers About Dubious Tax Positions

58 percent of Americans (about seven of twelve) have been around family members, friends or co-workers who discussed an unethical or even illegal strategy for tax preparation. Many had difficulty handling this awkward position: either choosing not to confront or being excessively confrontational. Common reasons for not confronting included "none of my business", lack of interest or fear of reprisal. Author and ethicist Joseph Grenny had the following recommendations: decide how to react--a co-workers brag about evading taxes can be handled differently than a sibling's ignorance of tax law; ask to see what the speaker knows--a possible approach here would be to ask the speaker whether they knew that this might be illegal; share concerns--if the speaker appears to know that the act may be wrong, let them know that you are uncomfortable without accusing or lecturing. The survey was developed by VitalSmarts, a corporate training organization.

An interesting read with what seem to be good ideas.

State Revenue Departments and IRS (Data) Dig for Dollars

More and more states, and increasingly the IRS, are using a technique called data mining to determine if taxpayers are underreporting tax liabilities. Examples of results obtained by data mining: Texas receiving $5 million in back taxes on out-of-state purchases of private aircraft; California raised an additional $180 billion annually. Moreover, revenue agencies are becoming more aggressive in mining--once limited to tax returns, tax authorities are now cross-checking with other governmental agencies and, for some states, with commercial sources such as infoUSA. Future projections include governmental searches of business purchasing records and even credit card statements; a trend which understandably worries civil libertarians (not to mention economic libertarians for other reasons).

Clearly and understandably, the US Department of the Treasury and state Tax Departments are concerned about a perceived tax gap. A tricky balance ensues: what level of pursuit of tax dollars is acceptable from aggressive and even evading taxpayers? An additional question: would a consumption tax help from the standpoint of reducing the tax gap or hurt from the standpoint of encouraging greater intrusiveness in governmental data mining?

Does Your Teen Have Any Sense about Dollars?

Professor Lewis Mandell (SUNY-Buffalo) reports that on a financial literacy exam given to nearly 5,800 students spread around 37 states, an average score was 52% or barely in excess of half. Some examples of questions which created problems for the students: only 40% realized that loss of parent's job would leave them without health insurance; 23% recognized that interest on savings accounts potentially was taxable and a mere 14% (1 of 7) believed that stocks generally had better long-term returns than bonds. The scores, unimpressive as they were, remained consistent with results of similar tests given in 2004, 2002 and 2000. The tests were developed by the Merrill Lynch Foundation.

It is not surprising that many teens have limited awareness of personal finance, the advertising that see emphasizes "what to buy" not "how to make money" and many parents put few limits on what their teens can spend. Additionally, for a variety of reasons, K-12 programs have few if any financially-oriented classes. One organization which has done a very good job to help to fill this void is Junior Achievement; results like these show that the need for JA won't be disappearing anytime soon.

Tax Prep Chains Hear Harsh Words from Top Tax Senators

Senate Finance Chair Charles Grassley (R-IA) and Minority Leader Max Baucus (D-MT) scorched major tax preparation chains (H R Block?, Jackson Hewitt?) after a GAO audit discovered widespread errors and potential fraud. The undercover audit involved 19 offices in an undisclosed major city and found that almost all were not only incorrect, but came with bad tax advice. The range of errors ranged from producing a errant $2,000 "overpayment" to a $1,500 "underpayment". A major concern was that 10 of the 19 outlets did not report business income. The GAO's caution about not extending the results of the audit beyond the city audited was ignored by Baucus, who stated that millions of returns mailed to the IRS may not be worth the paper that they were written on. Grassley also piled on, wondering why tax preparation businesses could be unregulated and stating that taxpayers should (but implying may not) be able to trust the advice of tax preparers.

It will be interesting to see how the tax blogging community addresses this issue in the next day or two. Some initial thoughts: H R Block really did not need this implication on top of other recent legal problems; the Senators MIGHT have been premature in their comments since other cities were not reviewed and the movement to specify ethics as part of state requirements for annual CPE seems to get buttressed by this audit.

A second link to the findings at Web CPA (http://www.webcpa.com/article.cfm?articleid=19828) includes a link to the full GAO report.

Update: Fellow Iowan Joe Kristen (http://www.rothcpa.com/archives/001801.php) clearly believes that Senator Grassley WAS premature in his comments.

"American Idol" for Comic Accountants?

Jamie Masada of The Laugh Factory, a major pair of comedy clubs in LA and NYC, has offered Big Apple accountants an opportunity to relate their funniest story involving the Internal Revenue Service; either by e-mail or in person. The contest will run until April 18 (17th for performers) and the winner will get $415 in gift certificates. Masada stated a desire to provide cheer to New York accountants and to bring out their "inner Bob Newhart."

FASB Revises Exposure Draft on Pensions and Post-Retirement Benefits

The revised ED from FASB would require balance sheet inclusion of pension underfunded or overfunded status based on fair value of plan assets; recognize as part of other comprehensive income actuarial gains and losses plus prior service cost; record transition adjustments, whether asset or obligation, as adjustments to beginning retained earnings; measure defined benefit assets and obligations as of employer's fiscal year date and require additional disclosures regarding deferred prior service costs and actuarial gains and losses. These modifications, in RETROACTIVE form, would be required for most businesses based on fiscal year-end with calendar year companies required to modify as of December 2006. For organizations which previously reported pension plans on a different fiscal year than corporate financials; a December 2006 deadline is set for publicly-traded companies with a one-year deferral for privately-held businesses and nonprofits. A FASB Roundtable on the ED will be held on June 27.

Yet one reason that only the largest of businesses and organizations can afford to keep a presently-existing defined benefits pension plan. Also, the change may affect willingness of privately-held businesses to provide post-retirement benefits, which may not be in societal best interests.

Still More Tax Traps to Avoid

ABC correspondent Elisabeth Leamy does a timely (taxes are due in two weeks except 15 days in parts of New England) piece on ways taxpayers can go wrong in getting their taxes together. First on her list--watch out for fast refund promotions by tax preparers. In some cases, this may involve a tax anticipation loan with interest that will water down your net refund. A second danger is having the preparer finding a retirement or other investment vehicle for your refund (see also last month's "BlockHeads Again" post); not all tax preparers are retirement experts. A nasty recent third danger is fake e-mails pruportedly from the IRS regarding taxes but actually a "phish" for identity theft. Next on her list--failing to take advantage of itemizing (keep those records organized!). Finally, be on the watch for fraudulent tax strategies, such as constitutional objections to taxes, setting up a "church" for tax reasons or tax "credits" based on ethnic status and past history.

Ms. Leamy has done a valuable service. The list may not be exhaustive but does provide a concise list of a number of common tax pitfalls.

Annual Report Analysis

I started grading one of my auditing assignments, a project where students found financials for a company of their choice on the Internet and, in the form of a memo, answered specific questions related to those financials, the notes, the audit report, etc. After doing this for a while, I must give great respect to Michelle Leder of Footnoted. She must have near-superhuman patience and tolerance for tedium to read all the reports that she must read.

Congress Meets; Gets Input from Representatives of Financial Statement Users

During the past week, the House Capital Markets Subcommittee heard from FASB Chairman Robert Herz, PCOAB Chairman Bill Gradison, SEC chief accountant Scott Taub, chief executives Colleen Cunningham of Financial Executives International (FEI) and Barry Melancon from the AICPA and Rebecca McEnally, capital markets policy director for the Charter Financial Analyst Center. Herz, Gradison and Taub primarily described the ongoing activities at their organizations and Melancon praised the potential of XBRL. The women were more prescriptive: Cunningham set forth a four-point program for improving financial reporting: less second-guessing by regulators of reasonable accounting interpretations, continued tort reform with emphasis on control of frivolous lawsuits, improved priorization of framework and standards by FASB and a more proactive approach by users in assuring usable and understandable financials. For her part, McEnally called for an emphasis on the shareholder's perspective in preparing financials, a single operating statement to summarize changes in assets and liabilities, fair value reporting on the balance sheet and a halt to quarterly earnings guidance from corporate executives.

Since the goal of financial accounting is to reflect the needs of financial statement users, it seems reasonable that the proposals of Cunningham and McEnally at least get good faith consideration. There may be good reasons not to accept certain recommendations from either Cunningham or McEnally, but they should not be dismissed out of hand.