THE Case for Accountants in Tax Practice

In response to a James Maule comment on the primacy of studying law for practicing in taxation, Joe Kristan of Roth CPA Updates makes an excellent case for the continuation of accountants as tax professionals. Worth the read.

IRS Plans to Make Public Allegations Against Practitioners Met with Strong Resistance

IRS proposals to announce legal actions against tax preparers prior to completion have strong opposition from the tax professional community. The Wall Street Journal reported Tuesday that present proposals would publicly list preparers who are under investigation. The proposal, said to focus on preparers who are "incompetent," "disreputable" or involved in bogus tax shelters; drew the following complaint from Tom Ohlsenschlager of the AICPA: "You can imagine what would happen if a particular CPA is being charged with an infraction. Clients probably wouldn't go to him. Our professional reputation is all we have to sell." The IRS countered by saying that opening up the sanction process might help other tax preparers from repeating the mistake. An additional part of the present proposal would be to limit contingent fee engagements to cases where the IRS formally audited or challenged the return.

While acknowledging that the IRS's "teaching moment" concept is somewhat valid; privacy rights have become VERY important in the U. S. over the last 30-40 years and the IRS has not convinced me that they have more rights than prosecutors in criminal cases or plantiff attorneys in civil cases to indiscriminately drag a taxpayer's or tax preparer's reputation through the mud prior to resolution. If a way can be found to disclose examples of wrongdoing with reasonable levels of protection of anonymity, fine; otherwise, the proposed standards appear to do more harm than good.

"...I Can't Save on Taxes This Way? That's Patently Absurd!!"

Kaye Thomas of Fairmark reports that the U. S. Patent Office has issued dozens of patents for specialized tax-savings plans. Therefore, it is not unrealistic to think that a technique that you or your tax professional have developed, especially for complex transactions, might be patented and subject to royalties. Although there is some risk of legal action, the more likely possibility is that a tax professional or financial institution may refuse to go along, leaving the taxpayer frustrated and with extra taxes to pay.

Congress is investigating and has indicated that these patents are contrary to Congressional intent. Appropriately so, only the most complex and esoteric of tax plans or strategies should even be considered for a patent.

UPDATE: Joe Kristen already addressed this at http://www.rothcpa.com/archives/001988.php#001988.

A Formula for Tax Preparation Disaster

Gina's Tax Blog (see link in title above) has a list of seven no-no's in dealing with taxes. Among discouraged activities are: failure to plan for taxes, planning only for the current year, lack of communication with tax professional, accept tax advice from sources of dubious value, excessively crave refunds, fail to leave a tax professional which has not done a good job and base choice of tax professional on price rather than quality. My guess is that many of these have been advanced before; I would also add: "taxpayers who pay so much attention to taxes that they overlook the impact of a given activity on overall after-tax income and/or wealth." Having said this, Ms. Gwozdz's post is certainly worth a read.

Sales Tax Holidays: Growing in Popularity, but Do They Work?

The District of Columbia and 13 states (all but one east of the Missouri River) are offering some form of exemption from sales tax on selected purchases (usually at least loosely school-related) during the next month or so. Additionally, Massachusetts may join in soon. The most commonly exempted items are clothing, computer software and school supplies with some states also including computer hardware. Proponents claim that the holiday is a boon to cash-strapped parents; critics say that the holiday causes net lost tax revenue.

About the only justification for a sales tax holiday; absent a concurrent reduction in state spending; is indirect support for education. To paraphrase Stanley Surrey--mayhaps direct spending on education (how's THAT for a biased position) may be more honest and efficient.

Form Filling's NOT Chilling

Total time spent in doing federal paperwork was 8.4 billion hours annually in fiscal 2005 (October 2004 to September 2005), up about 440 million hours or 5% from the year before, according to the Office of Management and Budget. About half of the increase came from the new prescription drug program with anti-spam regulations also adding over 100 million hours. OMB further estimates that paperwork will grow an additional 300 million hours in fiscal 2006. IRS contributes the largest total number of hours--spokesperson Beth Tucker asserts that the agency is attempting to mitigate paperwork but can only significantly reduce paperwork if substantative tax simplification occurs.

While paperwork is a form of clutter which reduces national efficiency, it also is a necessary part of regulating and protecting society and assuring that Congress' will (presumably the will of the people) is carried out. Ultimately, therefore, paperwork will continue as a necessary evil at best and social cost at worst as long as the American people view the benefits of big government to at least be as significant as the cost of big government.

Botched Computer Program for Fraud lets Over $200 Million Get Away

The Internal Revenue Service estimates that a poorly-written program and the inability of a government contractor to reinstate a previous antifraud computer program has produced losses of $200-300 million in tax revenue. Contractor Computer Sciences failed to deliver a promised fraud screening program in workable order and the IRS was unable to fully return the previous antifraud program by the time that the 2005 tax season had started. The result was that only one-third as many returns were flagged for fraud this year compared to last. Not surprisingly, the carnage has been significant; IRS employees have been fired, the contractor is under scrutiny and likely to penalized and Eric Solomon, nominee for Assistant Secretary for Tax Policy, has been severely questioned by Senators about the topic during confirmation hearings.

Brian Tankersley and others would have a better understanding of what needs to be done to get a seamless anti-fraud computer program going, but at the very least this failure of a IRS subcontractor will not help the prospects for privatizing IRS debt collection.

Executive Pay: Proper Timing OPTIONal

A study of executive pay by Eric Lei of the University of Iowa and Randall Heron of Indiana University indicated that stock option manipulation was disturbingly common in the late 1990s and early part of this decade. The authors studied nearly 40,000 executives at nearly 7,800 companies and found that over 13% of them were either backdated or otherwise manipulated, with a statistically significant bias toward manipulation favorable to the option-holder. Tech firms, firms with high "betas" (stock price volatility) and smaller firms were most affected. Firms audited by the major international firms (then known as the Big 5) were less associated with late filings and unscheduled grants, common indicators of manipulative activity. There appears to be some improvement since an August 2002 SEC directive condensed the reporting time for executive stock option grants.

Jack Ciesielski may be best able to put this finding into perspective, but clearly this is not a good development (note to those wanting to make political points--the period covered includes both WJC and GWB years). One presumes that the SEC will be taking action soon.

Canine Cancer? Again?

Between a quite ill dog (initial diagnosis--soft cell sarcoma, a form of cancer) and an intense teaching schedule (two five week courses), blogging may well be inconsistent for the next week and a half. I strongly encourage you to peruse the carnival list at right, along with the other links.

Update: Our English Setter, Misty was X-rayed Monday and cancer had spread into her lungs (and perhaps other parts of her, she was unable to walk Monday morning). In view of that, she died peacefully by injection Monday morning.

Taxpayer Advocate Nina Olson Plans Her Program

Ms. Olson has set four areas of emphasis for the upcoming fiscal year. Goal one: restrict the ability of tax preparers to disclose tax information--she feels that rules set last year need to be improved in regard to privacy. Goal two: eliminate the 20% down payment on offers in compromise--presumably here, she is trying to keep low-income taxpayers from being "priced out" of OICs and may also cause more disputed accounts to go to litigation. Goal three: clarify and communicate the 1998 directive allowing OICs to consider hardship and public policy considerations. Goal four: Opposition to private debt collection. An unoffical goal five is to loosen the ties between tax preparers and refund anticipation loan makers.

Ms. Olson has been consistent at looking out for the best interest of American taxpayers. Though I do not have the same concern about privatizing tax collections that she has; I think that her overall program is well-prepared.

A Picture is Worth 1000 Income Statements?

SEC Attorneys and The Focal Point, a graphics firm which can assist in legal proceedings, successfully prosecuted James Koenig of Waste Management for fraud. To reduce the financial complexities in the case, Focal Point developed numerous graphics to display accounting principles in question (to see examples, go to
http://www.thefocalpoint.com/news/recent-cases_sec.htm) through a process called Mental Mining. Estimated cost of the fraud, which occurred during the 1990s, exceeded $1 billion.

Congratulations to SEC and Focal Point on their efforts. I may refer some of my students to the Focal Point website.

Tax Planning Using S Corporations

Though tax bloggers usually are the "go-to" people on all things taxes, personal finance blogs do from time to time add some interesting thoughts worth considering to the tax discussion. In an post included in the Carnival of Business, Johnthan of My Money Blog discusses how using S-corporation form, if done properly, can legally save thousands of dollars of self-employment taxes for high earning self-employed professionals. His example was interesting: 2004 Vice Presidential candidate John Edwards in the context of his law firm.

SEC Filings Now Totally Searchable through EDGAR

The Securities and Exchange Commission has successfully completed their EDGAR (Electronic Document Gathering, Analysis and Retrieval) project and users can do real-time searches for filings during the last two years. EDGAR searches are available at http://www.sec.gov/edgar/searchedgar/webusers.htm . Chairman Christopher Cox believes that the EDGAR searches have potential to be extremely valuable to investors and analysts. The SEC is requesting feedback on the system.

Congratulations to the SEC, I am sure that many financial professionals salute this accomplishment.

Carnivals Revisited

After several months (too long!) outside the weekly carnivals, I make my first appearance in the Carnival of Investing with "Day Traders Revisited" from the end of June. A separate post in the Carnival, "After the Abacus..." by China Law Blog,
(http://www.chinalawblog.com/chinalawblog/2006/07/after_the_abacu.html) was an interesting tale of the pitfalls of dealing with China's new accounting rules for international businesses.

Also worth noting: the Carnivals of Business, the Capitalists, Debt Reduction and Personal Finance run today. Although the Carnival of Taxes is listed as a Monday blog in the links at right, the Taxes blog runs monthly off-season and will not republish for several weeks.

More Law Blogs Needed? and More Links Included

To my amazement and undoubtedly that of Joe Kristen, Eva Lang and others, Ari Kaplan argues in Law.Com's Legal Technology section argues that too few lawyers are blogging and that law firms should be more engaged in this communication form. With a "mere" 1000-2000 legal bloggers (not to be confused with 15-25 active accounting bloggers), Kaplan wonders at length by lawyers, with all their training in writing and communication, are not more actively engaged in the blogosphere. One can only say that the message of Mr. Kaplan, Michelle Golden (see below) and others quoted in this report applies to even a greater degree in accounting.

New links now on Tick Marks include Golden Marketing (Michelle Golden, recently quoted here in a post about Accounting blogging, provides marketing ideas for accountants, attorneys and others), SmartPros (a news service which has accounting and finance news as one of their primary focuses (or foci if you prefer)), Big 4 Guy (an anonymous but very interesting blog about auditing and technology), CPA Marketing Center Blog (ideas for marketing a CPA practice) and Gina's Tax Page (Gina Gwozdz of Texas is a "blog daughter" of Kerry Kerstetter of Tax Guru fame). Big 4 Guy would have been competitive in Tuesday's activity review. Golden Marketing and Smart Pros are in the News section; Big 4 Guy and CPA Marketing are in the Accounting section. Finally, I now have a link to the Carnival of Investing, newly hosted by My Money Blog. Welcome to all.

Kellas Named Head of International Standard-Setting

John Kellas has been reappointed as the chair of the International Auditing and Assurance Standards Board (IAASB), which is related to the International Federation of Accountants (IFAC). Kellas will enter his second term as head and has served on the IAASB since 2000; before that, he was active in auditing standard-setting in the UK. Kellas was praised by IFAC President Graham Ward for increasing public input in the standard-setting process and building relationships with national standard-setting agencies. Among the goals for the IAASB is development of unified international auditing standards with the intent of having these standards adopted by the European Union.

Projected vs. Accumulated Benefits: An FASB Hearing Stirs Up a Hornet's Nest

A FASB roundtable on a proposed standard for pension standards produced heated debate, with the FASB, SEC and investor representatives favoring projected benefits (PBO) and acturaries, accountants and business executives favoring accumulated benefits (ABO). Actuary William Sohn asserted that the PBO method assumed that the employee would continue indefinitely which he considered an unrealistic assumption. Scott Taub of the SEC countered that flexibility was essential and 100% precision on accounting numbers could be compromised if needed. Although investors favor the information content of the PBO method, they fear that a strong move to PBO might force many companies to eliminate or heavily change present pension plans. Chairman David Tweedle of the International Accounting Standards Board pointed out that IASB was watching with considerable interest; IASB plans to address smoothing of income statement effects of pensions first, then go to recording of pension liabilities. The proposed FASB standard, if adopted, would begin taking effect at the end of this year.

All but the most devoted partisans of the efficient market hypothesis probably would agree that some form of pension liability should be recorded on the balance sheet, especially for defined benefit plans. At the same time, the fear of companies abandoning, reducing coverage or modifying pension plans, especially if defined benefit, is a very real fear. My inclination would be to go with ABO, make sure that smooching and disclosure issues are thoroughly addressed with appropriate sanctions for non-compliance, then revisit PBO vs. ABO in 3-4 years after more information is available.

Accounting Blogger Activity--April to June, 2006

Just completed a review of the frequency of posts by posters which I have listed in the accounting links area for the second quarter of 2006. Most frequent poster is Tracy Coenen of Fraud Files with (by my probably imperfect count) 92 topical posts during the quarter (I attempted to not count posts of a personal finance, personal or off-topic nature). Close behind was Jack Ciesielski of Accounting Observer with 86 posts and Michelle Leder of Found in the Footnotes takes the "bronze medal" with 65 posts. Honorable mention goes to Rick Telberg of BSG CPA Trendlines and Janell Griener of Benefits Blog, each had over 30 posts. By comparison, I had about 55 accounting OR tax-related posts during the period.

Several things should be noted: [1] tax and personal finance bloggers were not included in this review--there probably will be a post of tax blogging activity in the future, [2] the numbers above indicate only the frequency of posts, not necessarily the level of depth or skill (although in practice all five bloggers listed do a very good job), [3] different readers may differ in their counts of posts primarily based on differing definitions of what constitutes a topical vs. personal or off-topic post.

God Bless America...

land that I love, stand beside her and guide her through the night with the light from above.

While on such topics: congratulations to Canada on their 139th this past weekend; my wife and I visited Nova Scotia recently and the Canadian economy seemed much healthier than when we were there nine years ago (it's amazing what getting rid of Chrietien accomplished, though Martin might deserve some credit for the recovery). On a more somber note, a memorial to the 50 or so who died (plus other injury victims) of London's subway bombing a year ago last Friday.

Announcement of CPA Firm Gifts to University Accounting Departments

A number of universities recently reported gifts from alumni and CPA firms for their accounting areas. Grant Thornton donated almost $40,000 to Kansas State; Illinois's CPA Endowment Fund funded a number of Illinois universities as well as scholarships; additionally, both Maryland and George Mason received $250,000 for a scholarship fund from CPA firm Beers and Cutler.

Congratulations to all the above universities on their new funding. At the risk of sounding selfish, it must be reported that the Chair of Accounting Blogging at Austin Peay State University is massively underfunded at the moment--the Chair still needs an inaugurial contribution.