Income Averaging for Fishers--Calming the Seas of Progressive Tax Rates

The Treasury Inspector General for Tax Administration recently released a 2004 survey indicating that over 4600 fishermen failed to use income averaging provisions from the American Jobs Creation Act of 2004 and thus overpaid taxes. Almost $2 and 1/2 million was overpaid and, disturbingly, a large majority had their returns done by paid preparers. A preceding report had bad news, though less bad, from farmers, where about half failed to use the three-year averaging provision. Averaging basically takes the average of three years of operations, thus in an industries like fishing or farming, where some years may be far more lucrative than others, keeping the fisher and farmer out of top tax rates in good years when they have little income in the other two years.

The most disturbing part of the story is the failure of paid preparers to take advantage of the provision. Maritime state tax CPE appears to need greater coverage of these provisions.

The Treasury Builds a Plan to Improve Tax Collection

In response to threats from Senator Max Baucus (D-MT) regarding Treasury nominees, the U. S. Treasury has brought forth "A Comprehensive Strategy for Reducing the Tax Gap." To close the gap between taxes collectable and taxes received, estimated to be about $300 billion annually, the Treasury set forth four principles with additional details to be provided later when funding is better known. The four principles include addressing unintentional error and tax evasion, targeting specific types of noncompliance, a dual emphasis on enforcement activities and taxpayer service and developing an enforcement plan which protects taxpayer rights.

It is hard to find anything to criticize, excepting vagueness, with this initial document. The more telling material will come later when the Treasury starts filling in the details.

SEC Accountants Weigh in on Stock Options

The Chief Accountant of the Securities and Exchange Commission issued a letter regarding the application of accounting research on stock options and recent complications in past practices regarding stock options. Among specific issues addressed are restatements of income caused by accounting errors in stock option grants, past corporate practices in granting options and determination of the grant award date. Specific concerns mentioned included backdating of grants, administrative delays and grant timing, uncertainty about recipient of grants and whether the grant was even legitimate, insufficient documentation of the grant process and tax ramifications of the option grants.

For many years, stock options have been a major part of executive compensation for most middle-sized and large corporations. It appears that such options are likely to be more closely regulated in the future.

GAO Executive Walker: We Must Do Better on Business Taxation

Comptroller General David Walker spoke this week before the Senate Finance Committee on the need for reform in business taxation. Walker placed his commentary in the context of general tax reform and said that the present business tax structure distorted investment decisions, encouraged tax shelters and tax evasion efforts and increased record-keeping costs. Walker proposed a broadening of the business income tax base, a reduction in complexity and preferences and some degree of neutrality between business sectors.

I approve of Walker's theory--to implement this theory, however, Congress must overcome several hurdles: inertia, a lack of strong public demand for reform and its own record for catering to special constituencies. Twenty years ago, all this came together; though I wish otherwise, I don't think that America is ready for another round of intense tax reform.

Miscellanity

[1] My "Frugal Cities" was included in yesterday's Festival of Frugality on the Blueprint for Financial Prosperity blog yesterday.

[2] Best wishes to Neil McIntyre on the UDE; apparently a case-based accounting exam given in Ontario. The exam apparently started yesterday and runs through tomorrow.

[3] I intend to add several new links soon, but school has kept me quite busy. Please be patient. Also, if you have a link to recommend (please do NOT! send commercial or spam links), submit a comment.

Big Boys Look to Shore Up SOX

A group of CEOs of major CPA firms and investment houses along with past top bureaucrats has founded the Committee on Capital Markets Regulation. The committee plans to look into Section 404 of Sarbanes-Oxley, legal liability on public company reporting, regulatory processes and shareholders rights. One-time White House economic adviser Glenn Hubbard and former Goldman Sachs president John Thornton will be co-chairs while CEOs of Deloitte and PriceWaterhouseCoopers are among the two dozen other members. Hal Scott, Harvard Law School professor and one ot the directors of the committee, points out that in the present environment capital is leaving the U.S. for overseas capital markets and that private capital is replacing publicly-traded securities. Scott then calls for a more "risk-based" approach to regulation. Present Treasury Secretary Henry Paulson praised the committee, which plans a first report by November, for providing ideas for future debate regarding government regulation of the finance industry.

Though certainly not as big a threat to present government regulation levels as the lawsuit regarding the constitutionally of the PCAOB, this committee appears to be one more indication that financial institutions and large CPAs are growing weary of the restrictiveness of the present regulatory climate. If the Republicans maintain control of both houses after the 2006 election, do not be surprised to see some weakening of the more restrictive features of SOX in the next six months or so.

SFAS 157: What is Market Value?

The Financial Accounting Standards Board recently issued a standard setting a single definition for fair market value. Prior to FASB Statement 157, more than 40 accounting standards required determination of fair value to comply with GAAP, but the definitions were inconsistent. The FASB asserts that the new standard is superior to the "mark to market" approach and that it requires greater disclosure if at least part of the value determination is not readily observable. The effective date of the standard will be November 15, 2007.

AICPA Offers Revised Exposure Draft on Independence Issues

The AICPA Professional Ethics Executive Committee has released an two-part exposure draft related to independence in auditing. This draft is a follow-up on an exposure draft from last year and addresses the impact which limitations on liability in engagement might have on independence, as well as guidance on the relationship between both foresnic accounting and tax preparation with independence. Of the findings in the engagement area, some of the more interesting include: provision that liability limitations must include a "perform services according to generally accepted auditing standards" proviso to avoid independence problems regarding compensatory damages, a "punitive" damage liability waiver is generally not an independence problem and alternative dispute resolution provisions usually are satisfactory, though specific language in such provisions could become problematic.

Ten Most Frugal American Cities (or, Do You Know How to Save Like San Jose?)

Forbes cites the second A. G. Edwards Nest Egg Index to determine the communities with the biggest savings performance. Criteria includes characteristics such as propensity to saving or invest, availability of pension plan or 401(k) by local employers, home ownership, debt level (including mortgage), net worth, household income and cost of living. Based on these criteria, the ten best cities were Los Alamos, NM; Fairfield County, CT; San Jose, CA; Torrington, CT; Minneapolis-St. Paul, MN; Barnstable Town, MA; Holland, MI; Washington, DC area; San Francisco-Oakland, CA and Edwards, CO. Through further investigation of the A. G. Edwards web page (linked in the Forbes article) New Jersey was the top-rated state; also, in general, the Midwest and Northeast tended to do best, although the West was improving.

Reading between the lines: education appears to be directly related to good Nest Egg performance while raising children appears to have at least a slight negative relation (my guess is that most of the cities listed above are cities where comparatively low proportions of adults are raising children). I would have liked more detail on how the criteria were applied.

"Gentlemen's 'C'" for IRS Taxpayer Assistance Centers

A report from the Inspector General for Tax Administration of the U.S. Treasury found that taxpayer assistance was correct 70-75% of the time when undercover agents raised questions. In two separate experiments, auditors developed 47 scenarios with 200 questions and surveyed 50 TAC offices. An additional ten scenarios totalling 80 questions were asked regarding the Katrina Emergency Relief Act and posed at 20 different TACs. For the general tax questions, 72-73% were answered correctly, 15% incorrectly and on 13% of questions the assistors were unable to answer the question and had to refer the questioner to alternate IRS sources. For Katrina topics, the assistors were right on 75%, wrong on 7-8% and unable to answer 17-18%. Contributing factors for errors/unable to answers included failure to use available tax tools, large number of questions asked and complexity of tax law. A seperate criticism of the Inspector General was poor quality of assistance given to taxpayers who were making payments. Average wait time was over 20 minutes and one set of taxpayers were turned away completely so the facility could close at a specific time. The IRS indicated willingness to improve both facets.

One of the continuing disappointments with the IRS is that the agency has not clearly owned accountability in cases where tax advice has been poor. The willingness to improve is good, I suppose, but is there any REAL consequences if this sort of result occurs again two years from now? Moreover, is there real protection for taxpayers if they follow bad IRS advice and end up on the wrong side of an audit?

A Somber Celebration of Carnivals

Five years ago this morning, on my brother's 42nd birthday (and the day after my wife's birthday), I was checking the Weather Channel and they made an unusual comment about New York. I soon switched to Fox News and via TV shared the horror of the day with millions of other Americans (my birthday brother was making a presentation in a big city skyscraper that day--thankfully, it was the Sears Tower in Chicago). My sympathies to readers who lost family or friends, my salute to those who valiantly tried to save lives, and my respect to the men and women who go into danger every day in Afghanistan or Iraq.

I didn't expect to being doing this, but I am in two carnivals; the Carnival of Investing ("Eight Investing Terms") and the Carnival of Personal Finance ("Academics Meet Auction...") today. Make sure to check the new (second edition) Carnival of Fraud at Fraud Files tomorrow.

Congratulations to Consumerism Commentary, Found in the Footnotes and pf blogs for making Kiplinger's must-see blog list in the October issue. (Editor's note--I tried to but failed to link to the blogs referenced today--I still need better html skills).

Microsoft Renames Accounting Software, Adds Online Capabilitites

Microsoft announced the beta version of Small Business Accounting (now called Office Accounting) last week and added integration with PayPal (online payment), eBay (online selling) and Equifax (credit checking). Additional features of the new software include Accountant Navigator (client management), Payroll Center for Accountants (manage multiple company payrolls from a single dashboard), as well as fixed asset management and security features. A future feature will be a foreign currency transaction exchange rate calculation. Reviewer Richard Morochove believed that while the PayPal connection would be the selling point, the best actual feature would be interface with Microsoft Office. He was somewhat critical of performance for the online connectivity applications but felt that the beta version is an upgrade over its predecessor.

Given the enthusiasm that many practitioners have for Quick Books, I am not holding my breath that this edition of "Office Accounting" will be a big hit. I guess, though, that I should be cautious of underestimating Microsoft's marketing prowess.

Academia Meets Auction Mania: The Latest Research Tips for e-Bay Selling

Business Week's Kerry Miller went through dozens of academic research papers found in economics, management and psychology and sifted out 10 ways to achieve the best selling prices. Kerry's suggestions:

1. Set the initial selling price low (unless you expect limited number[s] of interested bidders) to encourage competition and a higher ending price.

2. Set reserve prices with care (or skip them altogether), especially on items which you expect the unit price to be low.

3. Use photos with the listing. It is considered likely to increase the number of competitive buyers.

4. Don't sell everything at once. Defer sales of similar items long enough to give buyers a chance to restock their wallet.

5. Spell-check. Potential buyers may miss the item if misspelled.

6. Use light sales puffery without being dishonest. Compare to retail prices if these are running high.

7. Hold seven-day or even ten-day auctions. University of Arizona and Michigan research indicate that these generate higher sales prices.

8. Try to avoid ending an auction between 5-9 pm. It may be overlooked because of all the other auctions ending at this time.

9. Charge a reasonable fee for shipping. You need to cover costs, but this is not the place to make your profit.

10. Handle the post-transaction shipping, thank-yous, etc. professionally to assure positive feedback. Your chances of successful increase greatly if you consistently get positive feedback and ESPECIALLY if you avoid negative feedback.

The author points out that buyers may want to reserve the strategies (look for auctions ending between 5-9 pm, look for auctions with misspellings or no photos, etc.) to reduce their purchase price.

A quick brag on my wife--she figured out pretty much all of these tips on her own.

Eight Key Investing Terms

Stuart Kahan of CPA Wealth Provider quotes economist Benjamin Graham as saying that investors need to make thoughtful, dispassionate analysis on each expenditure to make sure that they are investors and not speculators. Eight investing terms that Stuart believes are critical to accomplishing this are: annual return (change in value of investment); asset allocation (organizing investments in attempt to meet or exceed return expectations while minimizing risk); benchmark (standard of quality for a given type of investment); bond (debt security issued by an organization. Usually long-term and usually with multiple holders/investors. Conservative investment used to control risk.); capital gains (growth in value of investment after acquisition. Often a tax-advantaged form of return--both because tax deferred until sale and frequently because of favorable tax rate); diversification (using multiple investments to control risk); dollar-cost averaging (continuing to invest regularly regardless of whether market is favorable or unfavorable); stock (means of determining proportionate ownership in a corporation). Kahan does not promise that knowledge of these terms will quickly make you richer, but he does say that knowing them will make you a smarter investor.

Most terms here are cut-and-dried for the average personal finance blog reader, though some may not know asset allocation or dollar-cost averaging. It nevertheless is important to remember that a number of investors have been burned over the years by thinking that they knew (or pretending to know) some investing term or phrase without truly understanding it.

International Public Sector Standards Setters Move to Toronto

The International Public Sector Accounting Standards Board has taken up Canada on a $1 million (US) incentive and office space and moved much of its operations, including Technical Director Stephanie Fox, to Toronto. Canadian Institute of Chartered Accountants (CICA) President Kevin Dancey and IFAC Chairman Graham Ward each celebrated the agreement and looked forward to its role in upgrading financial reporting of governmental entities. Some issues likely to be addressed include accrual accounting for governments and accounting for social policy obligations.

Congratulations to Toronto and Canada on this development. New link Neil McIntyre might have something to say about this soon.

CPA Firms Grow as Fast as Teenage Boys

Commerce Clearing House just released a study where Top 100 firms outside the Big Four had average growth of almost 22% in 2005 (Big Four firms grew at a more than respectable 14.7%). Jonathan Hamilton of Public Accounting Growth attributed the earnings growth to the profession's responsiveness to changes in the business and regulatory environment. Overall, Deloitte and Ernst and Young led the still-dominant Big Four while Midwestern-headquartered McGladrey, Grant Thornton, Seidman, Crowe, Mayer Hoffman and BKD solidfied their claim to legitimate "Second Six" status with McGladrey and Crowe having particularly good years. The strongest growth was in the Northeast and West with each in excess of 18% revenue growth but all regions exceeding 10% growth.

Congratulations to the larger CPA firms on their success this year. Hopefully, smaller CPA firms are doing as well.

Labor Day Carnivals and Internationalizing the Blogroll

Two Carnivals are up today: Carnival of the Capitalists (including a Roth CPA Updates post) and Carnival of Debt Reduction. The Carnival of Personal Finance will be published tomorrow and the Carnivals of Business and Investing appear to be in a state of flux.

The blogroll has its first known non-US entrant with Neil McIntyre, who looks at accounting (and other societal developments) from a Canadian (Toront0) perspective.

Save A Lunch (or several) Worth of Taxes

The IRS announced that long-distance tax refunds, from the outdated (Spanish-American War) telephone tax; will save customers $30 to $60. The savings will be based on exemptions: $30 for one exemption (singles) with $10 increments per exemption to $60 if the return shows four or more exemptions. IRS Commissioner Mark Everson claims that this approach will save taxpayers from looking up years worth of telephone bills.
For 1040 and 1040A taxpayers, an extra line will be added to those returns while 1040-EZ taxpayers will get a one-time special form (Form 1040EZ-T). At the moment, business and nonprofits wanting refunds must calculate their rebate based on actual bills.

The IRS decision appears to be primarily (and reasonably) based on administrative convenience. Regardless of the small size, the tax refund will be a welcome return of the taxpayer's rightful monies.